Essay on Case analysis “CASE: Xcel Energy Pays for Employees Who Excel” Chapter 12, 3 questions at the end need to be answered in the essay

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Home >Human Resource Management homework help >Essay on Case analysis “CASE: Xcel Energy Pays for Employees Who Excel” Chapter 12, 3 questions at the end need to be answered in the essay

Recognizing Employee Contributions with Pay

What Do I Need to Know? After reading this chapter, you should be able to:

LO1 Discuss the connection between incentive pay and employee performance.

LO2 Describe how organizations recognize individual performance.

LO3 Identify ways to recognize group performance.

LO4 Explain how organizations link pay to their overall performance.

LO5 Describe how organizations combine incentive plans in a “balanced scorecard.”

LO6 Summarize processes that can contribute to the success of incentive programs.

LO7 Discuss issues related to performance- based pay for executives.

Introduction The 7,500 employees of Jamba Juice Company know how to earn more money. They know that their pay raises depend on how well they performed their jobs the previous year. Supervisors rank em- ployees according to whether their performance was outstanding, above requirements, meeting requirements, or below requirements. Those in the top category receive the largest raises. Those rated as performing below requirements receive no raise at all, and they don’t have a chance to earn a bonus. According to Russ Testa, Jamba Juice’s vice president of human resources, this pay system is a practical matter of allocating the company’s money to the company’s best employees: “If you’re devoting dollars to underperformers, that simply means you’re taking away from your high performers.” 1 Employees consider the process fair because they understand how their performance will be measured and how it will affect their pay. The pay earned by each Jamba Juice employee depends on the starting pay for a particular job (the topic of the preceding chapter) and pay raises tied to the employee’s performance. In this chapter we focus on using pay to recognize and reward employees’ con- tributions to the organization’s success. Employees’ pay does not depend solely on the jobs they hold. Instead, organizations vary the amount paid accord- ing to differences in performance of the individual, group, or whole organization, as well as differences in employee qualities such as seniority and skills. 2 In contrast to decisions about pay structure, organizations have wide discretion in setting performance-related pay, called incentive pay. Organizations can tie incentive pay to individual performance, profits, or many other measures of success. They select incentives based on their costs, expected influence on performance, and fit with the organization’s broader HR and company policies and goals. These decisions are significant. A study of 150 organizations found that the way organiza- tions paid employees was strongly associated with their level of profitability. 3

chapter twelve

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CHAPTER 12 Recognizing Employee Contributions with Pay 339

This chapter explores the choices available to organizations with regard to incen- tive pay. First, the chapter describes the link between pay and employee performance. Next, we discuss ways organizations provide a variety of pay incentives to individuals. The following two sections describe pay related to group and organizational perfor- mance. We then explore the organization’s processes that can support the use of incentive pay. Finally, we discuss incentive pay for the organization’s executives.

Incentive Pay Along with wages and salaries, many organizations offer incentive pay —that is, pay specifically designed to energize, direct, or control employees’ behavior. The “ Did You Know? ” box illustrates the popularity of this type of pay. Incentive pay is influential because the amount paid is linked to certain predefined behaviors or outcomes. For example, as we will see in this chapter, an organization can pay a salesperson a com- mission for closing a sale, or the members of a production department can earn a bonus for meeting a monthly production goal. Usually, these payments are in addition to wages and salaries. Knowing they can earn extra money for closing sales or meeting departmental goals, the employees often try harder or get more creative than they might without the incentive pay. In addition, the policy of offering higher pay for higher performance may make an organization attractive to high performers when it is trying to recruit and retain these valuable employees. 4 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 following requirements:

• Performance measures are linked to the organization’s goals. • Employees believe they can meet performance standards. • The organization gives employees the resources they need to meet their goals. • Employees value the rewards given. • Employees believe the reward system is fair. • The pay plan takes into account that employees may ignore any goals that are not

rewarded.

Since incentive pay is linked to particular outcomes or behaviors, the organiza- tion is encouraging employees to demonstrate those chosen outcomes and behaviors. As obvious as that may sound, the implications are more complicated. If incentive pay is extremely rewarding, employees may focus on only the performance measures rewarded under the plan and ignore measures that are not rewarded. Suppose an organization pays managers a bonus when employees are satisfied; this policy may interfere with other management goals. A manager who doesn’t quite know how to inspire employees to do their best might be tempted to fall back on overly positive performance appraisals, letting work slide to keep everyone happy. Similarly, many call centers pay employees based on how many calls they handle, as an incentive to work quickly and efficiently. However, speedy call handling does not necessarily foster good customer relationships. As we will see in this chapter, organizations may combine a number of incentives so employees do not focus on one measure to the exclusion of others. Attitudes that influence the success of incentive pay include whether employees value the rewards and think the pay plan is fair. Offering money as an incentive avoids the pitfall of inappropriate rewards. An insurance company in California once rewarded salespeople with tickets to a Christmas program at a nearby cathedral.

LO1 Discuss the connection between incentive pay and employee performance.

incentive pay Forms of pay linked to an employee’s performance as an individual, group member, or organiza- tion member.

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One-third of the salespeople were Jewish, and they were more than unenthusiastic— they were offended. 5 Although most, if not all, employees value pay, it is important to remember that earning money is not the only reason people try to do a good job. As we discuss in other chapters (see Chapters 4, 8, and 13), people also want inter- esting work, appreciation for their efforts, flexibility, and a sense of belonging to the work group—not to mention the inner satisfaction of work well done. Therefore, a complete plan for motivating and compensating employees has many components, from pay to work design to developing managers so they can exercise positive leadership. With regard to the fairness of incentive pay, the preceding chapter described equity theory, which explains how employees form judgments about the fairness of a pay structure. The same process applies to judgments about incentive pay. In general, employees compare their efforts and rewards with other employees’, considering a plan to be fair when the rewards are distributed according to what the employees contribute. The remainder of this chapter identifies elements of incentive pay systems. We consider each option’s strengths and limitations with regard to these principles. The many kinds of incentive pay fall into three broad categories: incentives linked to indi- vidual, group, or organizational performance. Choices from these categories should consider not only their strengths and weaknesses, but also their fit with the organiza- tion’s goals. The choice of incentive pay may affect not only the level of motivation but also the kinds of employees who are attracted to and stay with the organization. For example, there is some evidence that organizations with team-based rewards will tend to attract employees who are more team-oriented, while rewards tied to individ- ual performance make an organization more attractive to those who think and act in- dependently, as individuals. 6

Did You Know? Most Companies Use Incentive Pay

Most large companies use some form of variable (incentive) pay, and they are spending almost 12 cents out of every dollar on this category

of compensation. As recently as 1991, only about half of compa- nies had a variable-pay plan for a majority of their employees.

Source: Hewitt Associates, “Hewitt Study: While Salary Increases in 2008 Remain Modest, Variable Pay Awards Reach Record High,” news release, August 21, 2007, www.hewittassociates.com .

Percentage of companies using variable pay

Variable pay as a percentage of payroll

90%

11.8%

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CHAPTER 12 Recognizing Employee Contributions with Pay 341

Pay for Individual Performance Organizations may reward individual performance with a variety of incentives:

• Piecework rates • Standard hour plans • Merit pay • Individual bonuses • Sales commissions

Piecework Rates

As an incentive to work efficiently, some organizations pay production workers a piecework rate, a wage based on the amount they produce. The amount paid per unit is set at a level that rewards employees for above-average production volume. For example, suppose that on average, assemblers can finish 10 components in an hour. If the organization wants to pay its average assemblers $8 per hour, it can pay a piece- work rate of $8/hour divided by 10 components/hour, or $.80 per component. An assembler who produces the average of 10 components per hour earns an amount equal to $8 per hour. An assembler who produces 12 components in an hour would earn $.80 3 12, or $9.60 each hour. This is an example of a straight piecework plan, because the employer pays the same rate per piece, no matter how much the worker produces. A variation on straight piecework is differential piece rates (also called rising and falling differentials ), in which the piece rate depends on the amount produced. If the worker produces more than the standard output, the piece rate is higher. If the worker produces at or below the standard, the amount paid per piece is lower. In the preceding example, the differential piece rate could be $1 per component for com- ponents exceeding 12 per hour and $.80 per component for up to 12 components per hour. In one study, the use of piece rates increased production output by 30 percent— more than any other motivational device evaluated. 7 An obvious advantage of piece rates is the direct link between how much work the employee does and the amount the employee earns. This type of pay is easy to understand and seems fair to many peo- ple, if they think the production standard is reasonable. In spite of their advantages, piece rates are relatively rare for several reasons. 8 Most jobs, including those of man- agers, have no physical output, so it is hard to develop an appropriate performance measure. This type of incentive is most suited for very routine, standardized jobs with output that is easy to measure. For complex jobs or jobs with hard-to-measure outputs, piecework plans do not apply very well. Also, unless a plan is well designed to include performance standards, it may not reward employees for focusing on quality or cus- tomer satisfaction if it interferes with the day’s output. In Figure 12.1 , 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. More seri- ously, a bonus based on number of faucets produced gives production workers no incentive to stop a manufacturing line to correct a quality-control problem. Production- oriented goals may do nothing to encourage employees to learn new skills or co- operate with others. Therefore, individual incentives such as these may be a poor incentive in an organization that wants to encourage teamwork. They may not be helpful in an organization with complex jobs, employee empowerment, and team- based problem solving.

LO2 Describe how organizations recognize individual performance.

piecework rate A wage based on the amount workers produce.

straight piecework plan Incentive pay in which the employer pays the same rate per piece, no matter how much the worker produces.

differential piece rates Incentive pay in which the piece rate is higher when a greater amount is produced.

piecework rate A wage based on the amount workers produce.

straight piecework plan Incentive pay in which the employer pays the same rate per piece, no matter how much the worker produces.

differential piece rates Incentive pay in which the piece rate is higher when a greater amount is produced.

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342 PART 4 Compensating Human Resources

Standard Hour Plans Another quantity-oriented incentive for production workers is the standard hour plan, an incentive plan that pays workers extra for work done in less than a preset “standard time.” The organization determines a standard time to complete a task, such as tuning up a car engine. If the mechanic completes the work in less than the standard time, the mechanic receives an amount of pay equal to the wage for the full standard time. Suppose the standard time for tuning up an engine is 2 hours. If the mechanic finishes a tune-up in 1½ hours, the mechanic earns 2 hours’ worth of pay in 1½ hours. Working that fast over the course of a week could add significantly to the mechanic’s pay. In terms of their pros and cons, standard hour plans are much like piecework plans. They encourage employees to work as fast as they can, but not necessarily to care about quality or customer service. Also, they only succeed if employees want the extra money more than they want to work at a pace that feels comfortable.

Merit Pay

Almost all organizations have established some program of merit pay —a system of linking pay increases to ratings on performance appraisals. (Chapter 8 described the content and use of performance appraisals.) To make the merit increases consistent, so they will be seen as fair, many merit pay programs use a merit increase grid, such as the sample for Merck, the giant drug company, in Table 12.1 . As the table shows, the 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, as defined in Chapter 11). This system gives the biggest pay increases to the best performers and to those whose pay is relatively low for their job. At the highest extreme, an exceptional employee earning 80 percent of the average pay for his job could receive a 15 percent merit raise. An employee rated as having “room for improvement” would receive a raise only if that employee was earning relatively low pay for the job (compa-ratio of .95 or less). By today’s standards, all of these raises are large, because they were created at a time when inflation was strong and economic forces demanded big pay increases to keep up with the cost of living. The range of percentages for a policy used today would be lower. Organizations establish and revise merit increase grids in light of changing economic conditions. When organizations revise pay ranges, employees have new compa-ratios. A higher pay range would result in lower compa-ratios, causing employees to become

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

merit pay A system of linking pay increases to ratings on perfor- mance appraisals.

Figure 12.1

How Incentives Sometimes “Work”

SOURCE: DILBERT reprinted by permission of United Features Syndicate, Inc.

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CHAPTER 12 Recognizing Employee Contributions with Pay 343

eligible for bigger merit increases. An advantage of merit pay is therefore that it makes the reward more valuable by relating it to economic conditions. A drawback is that conditions can shrink the available range of increases. During recent years, budgets for merit pay increases were about 3 to 5 percent of pay, so average performers could receive a 4 percent raise, and top performers perhaps as much as 6 per- cent. The 2-percentage-point difference, after taxes and other deductions, would amount to only a few dollars a week on a salary of $40,000 per year. Over an entire career, the bigger increases for top performers can grow into a major change, but viewed on a year-by-year basis, they are not much of an incentive to excel. 9 As Figure 12.2 shows, companies typically spread merit raises fairly evenly across all employees. However, experts advise making pay increases twice as great for top performers as for average employees—and not rewarding the poor performers with a raise at all. 10 Imagine if the raises given to the bottom two categories in Figure 12.2 instead went toward 7 percent raises for the top performers. This type of decision signals that excellence is rewarded.

TABLE 12.1

Sample Merit Increase Grid

SUGGESTED MERIT INCREASE PERCENTAGE

COMPA-RATIO COMPA-RATIO COMPA-RATIO COMPA-RATIO PERFORMANCE RATING 80.00–95.00 95.01–110.00 110.01–120.00 120.01–125.00

EX (Exceptional within Merck) 13–15% 12–14% 9–11% To maximum of range WD (Merck Standard with Distinction) 9–11 8–10 7–9 — HS (High Merck Standard) 7–9 6–8 — — RI (Merck Standard Room for 5–7 — — — Improvement) NA (Not Adequate for Merck) — — — —

Note: Experts advise that the top category should receive twice as much as the middle category.

Lowest Rated

Low Rated

Middle Rated

Next Highest Rated

Highest-Rated Workers

Average Pay Increase

102 4 6 8

Figure 12.2

Ratings and Raises: Underrewarding the Best

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344 PART 4 Compensating Human Resources

Another advantage of merit pay is that it provides a method for rewarding perfor- mance in all of the dimensions measured in the organization’s performance manage- ment system. If that system is appropriately designed to measure all the important job behaviors, then the merit pay is linked to the behaviors the organization desires. This link seems logical, although so far there is little research showing the effectiveness of merit pay. 11 A drawback of merit pay, from the employer’s standpoint, is that it can quickly become expensive. Managers at a majority of organizations rate most employees’ performance in the top two categories (out of four or five). 12 Therefore, the majority of employees are eligible for the biggest merit increases, and their pay rises rapidly. This cost is one reason that some organizations have established guidelines about the percentage of employees that may receive the top rating, as discussed in Chapter 8. Another correction might be to use 360-degree performance feedback (discussed in Chapter 9), but so far, organizations have not used multisource data for pay decisions. 13 Another drawback of merit pay is that it makes assumptions that may be mislead- ing. Rewarding employees for superior performance ratings assumes that those ratings depend on employees’ ability and motivation. But performance may actually depend on forces outside the employee’s control, such as managers’ rating biases, the level of cooperation from co-workers, or the degree to which the organization gives employees the authority, training, and resources they need. Under these conditions, employees will likely conclude that the merit pay system is unfair. Quality guru W. Edwards Deming also criticizes merit pay for discouraging teamwork. In Deming’s words, “Everyone propels himself forward, or tries to, for his own good, on his own life preserver. The organization is the loser.” 14 For example, if employees in the purchasing department are evaluated based on the number or cost of contracts they negotiate, they may have little interest in the quality of the materials they buy, even when the manufacturing department is having quality problems. In reaction to such problems, Deming advocated the use of group incentives. Another alternative is for merit pay to include ratings of teamwork and cooperation. Some employers ask co- workers to provide such ratings.

Performance Bonuses

Like merit pay, performance bonuses reward individual performance, but bonuses are not rolled into base pay. The employee must re-earn them during each performance period. In some cases, the bonus is a one-time reward. Bonuses may also be linked to objective performance measures, rather than subjective ratings. Bonuses for individual performance can be extremely effective and give the organi- zation great flexibility in deciding what kinds of behavior to reward. For example, as we saw in Chapter 2, Continental Airlines pays employees a quarterly bonus for rank- ing in the top three airlines for on-time arrivals, a measure of service quality. In many cases, employees receive bonuses for meeting such routine targets as sales or produc- tion numbers. Such bonuses encourage hard work. But an organization that focuses on growth and innovation may get better results from rewarding employees for learning new skills than from linking bonuses to mastery of existing jobs. Adding to this flexibility, organizations also may motivate employees with one-time bonuses. For example, when one organization acquires another, it usually wants to retain certain valuable employees in the organization it is buying. Therefore, it is com- mon for organizations involved in an acquisition to pay retention bonuses —one-time in- centives paid in exchange for remaining with the company—to top managers, engineers,

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CHAPTER 12 Recognizing Employee Contributions with Pay 345

top-performing salespeople, and information technology specialists. When Wachovia Securities announced its merger with A. G. Edwards & Sons, it arranged to pay reten- tion bonuses to A. G. Edwards brokers who remained with the company one month af- ter completion of the merger. Some left, but most were still there when Wachovia issued the checks five months later. 15

Sales Commissions

A variation on piece rates and bonuses is the payment of commissions, or pay calculated as a percentage of sales. For instance, a furniture salesperson might earn commissions equaling 6 percent times the price of the furniture the person sells during the period. Selling a $2,000 couch would add $120 to the salesperson’s commissions for the period. At most organizations, commissions range from 5 percent to 20 percent of sales. 16 Some salespeople earn a commission in addition to a base salary; others earn only commissions—a pay arrangement called a straight commission plan. Straight commissions are common among insurance and real estate agents and car salespeople. Other salespeople earn no commissions at all, but a straight salary. 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 in- fluence how they spend their time, how they treat cus- tomers, 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. 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.

Pay for Group Performance Employers may address the drawbacks of individual incentives by including group incentives in the organization’s compensation plan. To win group incentives, employees must cooperate and share knowledge so that the entire group can meet its performance targets. Common group incentives include gainsharing, bonuses, and team awards.

Gainsharing

Organizations that want employees to focus on efficiency may adopt a gainsharing pro- gram, which measures increases in productivity and effectiveness and distributes a por- tion of each gain to employees. For example, if a factory enjoys a productivity gain

commissions Incentive pay calculated as a percentage of sales.

LO3 Identify ways to recognize group performance.

gainsharing Group incentive program that measures improve- ments in productivity and effectiveness and distributes a portion of each gain to employees.

Many car salespeople earn a straight commission, meaning that 100% of their pay comes from commission instead of a salary. What type of individual might enjoy a job like this?

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346 PART 4 Compensating Human Resources

worth $30,000, half the gain might be the company’s share. The other $15,000 would be distributed among the employees in the factory. Knowing that they can enjoy a finan- cial benefit from helping the company be more productive, employees supposedly will look for ways to work more efficiently and improve the way the factory operates. Gainsharing addresses the challenge of identifying appropriate performance mea- sures for complex jobs. For example, how would a hospital measure the production of its nurses—in terms of satisfying patients, keeping costs down, or completing a number of tasks? Each of these measures oversimplifies the complex responsibilities involved in nursing care. Even for simpler jobs, setting acceptable standards and measuring per- formance can be complicated. Gainsharing frees employees to determine how to improve their own and their group’s performance. It also broadens employees’ focus beyond their individual interests. But in contrast to profit sharing, discussed later, it keeps the performance measures within a range of activity that most employees believe they can influence. Organizations can enhance the likelihood of a gain by providing a means for employees to share knowledge and make suggestions, as we will discuss in the last section of this chapter. Gainsharing is most likely to succeed when organizations provide the right conditions. Among the conditions identified, the following are among the most common: 17

• Management commitment. • Need for change or strong 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.

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. To keep this ratio low enough to earn the bonus, workers have to keep labor costs to a minimum and produce as much as possible with that amount of labor. Figure 12.3 provides an example. In this example, 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.

Typically, an organization does not pay workers all of the gain immediately. First, the organization keeps a share of the gain to improve its own bottom line. A portion of the remainder goes into a reserve account. This account offsets losses in any months when the gain is negative (that is, when costs rise

Scanlon plan A gainsharing program in which employees receive a bonus if the ratio of labor costs to the sales value of production is below a set standard.

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.

Target Ratio:

Sales Value of Production: $1,200,000

=Labor Costs Sales Value of Production

20 100

Goal:

Actual: $210,000

Gain: $240,000 – $210,000 = $30,000

× $1,200,000 = $240,00020 100

Figure 12.3

Finding the Gain in a Scanlon Plan

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CHAPTER 12 Recognizing Employee Contributions with Pay 347

or production falls). At the end of the year, the organization closes out the account and distributes any remaining surplus. If there were a loss at the end of the year, the organization would absorb it.

Group Bonuses and Team Awards

In contrast to gainsharing plans, which typically reward the per- formance of all employees at a facility, bonuses for group perfor- mance tend to be for smaller work groups. 18 These bonuses reward the members of a group for attaining a specific goal, usu- ally measured in terms of physical output. Team awards are simi- lar to group bonuses, but they are more likely to use a broad range of performance measures, such as cost savings, successful completion of a project, or even 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. However, depending on the reward system, competition among individuals may be replaced by competition among groups. Competition may be healthy in some situations, as when groups try to outdo one another in satisfying customers. On the downside, competition may also prevent necessary cooperation among groups. To avoid this, 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.

Pay for Organizational Performance 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. These organization-level incentives can motivate employees to align their activi- ties with the organization’s goals. For example, when Harry Kraemer joined Baxter International as chief financial officer, he observed that the executives in charge of the company’s divisions operated so independently that Baxter lacked focus. To align the executives’ efforts, Kraemer directed the company to change its incentive pay policy. Instead of relying on bonuses linked to divisional results, Baxter encouraged managers to purchase the company’s stock and later began granting stock options to all employees. 19 Linking incentives to the organization’s profits or stock price exposes employees to a high degree of risk. Profits and stock price can soar very high very fast, but they can also fall. The result is a great deal of uncertainty about the amount of incentive pay each employee will receive in each period. Therefore, these kinds of incentive pay are likely to be most effective in organizations that emphasize growth and inno- vation, which tend to need employees who thrive in a risk-taking environment. 20

LO4 Explain how organizations link pay to their overall performance.

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. What are some advantages and disadvantages of group bonuses?

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The “ HR Oops !” box discusses why employees can become frustrated with pay linked to organizational performance.

Profit Sharing

Under profit sharing, payments are a percentage of the organization’s profits and do not become part of the employees’ base salary. For example, General Motors provides for profit sharing in its contract with its workers’ union, the United Auto Workers. Depending on how large GM’s profits are in relation to its total sales for the year, at least 6 percent of the company’s profits are divided among the workers according to how many hours they worked during the year. 21 The formula for computing and divid- ing the profit-sharing bonus is included in the union contract. Organizations use profit sharing for a number of reasons. It may encourage employ- ees to think more like owners, taking a broad view of what they need to do in order to make the organization more effective. They are more likely to cooperate and less likely to focus on narrow self-interests. Also, profit sharing has the practical advan- tage of costing less when the organization is experiencing financial difficulties. If the organization has little or no profit, this incentive pay is small or nonexistent, so employers may not need to rely as much on layoffs to reduce costs. 22 Does profit sharing help organizations perform better? The evidence is not yet clear. Although research supports a link between profit-sharing payments and profits, researchers have questioned which of these causes the other. 23 For example, Ford, Chrysler, and GM have similar profit-sharing plans in their contracts with the United Auto Workers, but the payouts are not always similar. In one year, the average worker received $4,000 from Ford, $550 from GM, and $8,000 from Chrysler. Since the plans are similar, something other than the profit sharing must have made Ford and Chrysler more profitable than GM.

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.

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HR Oops! Too Much Risk, Too Little Reward

A survey by HR consulting firm Towers Perrin found that setting up a variable-pay program such as profit sharing is not necessarily linked to better performance. Also, most of the companies that use these plans don’t even know they have a problem, because they do not have a method to measure whether the programs are giving them a good return on investment. One change the plans are mak- ing is shifting risks to employees. If the company has a good year, employees enjoy a big profit- sharing check. But if sales slow

down, expenses rise, and profits fall, the company does not have to pay them as much. The problem with that, according to Ravin Jesuthasan of Towers Perrin, is that “you can’t keep transferring risk to employees without also transfer- ring control.” In other words, if pay is related to profits, then employees need to have control over the fac- tors that lead to high profits. Other- wise, employees will simply become indifferent to or frustrated with the profit-sharing plan.

Source: Fay Hansen, “Control and Customization,” Workforce Management, November 5, 2007, p. 42.

Questions 1. Broadly speaking, what are

some of the conditions, forces, and company actions that con- tribute to high profits? What are some of the conditions, forces, and company actions that hurt profits?

2. Which of these factors can a salesperson control? Which can an engineer control? Which can be controlled by a production supervisor and a production worker?

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CHAPTER 12 Recognizing Employee Contributions with Pay 349

Differences in payouts, as in the preceding example, raise questions not only about the effectiveness of the plans, but about equity. Assuming workers at Ford, Chrysler, and GM have similar jobs, they would expect to receive similar profit-sharing checks. In the year of this example, GM workers might have seen their incentive pay as highly inequitable unless GM could show how Chrysler workers did more to earn their big checks. Employees also may feel that small profit-sharing checks are unfair because they have little control over profits. If profit sharing is offered to all employees but most employees think only management decisions about products, price, and market- ing have much impact on profits, they will conclude that there is little connection be- tween their actions and their rewards. In that case, profit-sharing plans will have little impact on employee behavior. This problem is even greater when employees have to wait months before profits are distributed. The time lag between high-performance behavior and financial rewards is simply too long to be motivating. An organization setting up a profit-sharing plan should consider what to do if profits fall. If the economy slows and profit-sharing payments disappear along with profits, employees may become discouraged or angry. Mission Controls Automation counters this problem with open sharing of information and a commitment to avoid layoffs whenever possible. The engineering firm, located in Costa Mesa, California, gives em- ployees profit-sharing payments when business is profitable. When economic conditions sour, employees understand what is happening and how they can make a difference. Management calls everyone together for twice-a-year financial meetings to explain the company’s performance, and employees elect representatives to the company’s board of directors. 24 The open sharing of information supports the profit-sharing incentive at Mission Controls because employees understand the connection between what they are doing and how well the company performs—as well as the impact of the business cycle—so the program seems fair. For more ideas on how to set up a profit-sharing plan that effectively motivates employees, see the “ HR How To ” box. 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.

Stock Ownership

While profit-sharing plans are intended to encourage employees to “think like own- ers,” a stock ownership plan actually makes employees part owners of the organiza- tion. Like profit sharing, employee ownership is intended as a way to encourage employees to focus on the success of the organization as a whole. The drawbacks of stock ownership as a form of incentive pay are similar to those of profit sharing. Specifically, it may not have a strong effect on individuals’ motivation. Employees may not see a strong link between their actions and the company’s stock price, espe- cially in larger organizations. The link between pay and performance is even harder to appreciate because the financial benefits mostly come when the stock is sold— typically when the employee leaves the organization. Ownership programs usually take the form of stock options or employee stock ownership plans. These are illustrated in Figure 12.4 .

Stock Options One way to distribute stock to employees is to grant them stock options —the right to buy a certain number of shares of stock at a specified price. (Purchasing the stock is called exercising the option.) Suppose that in 2005 a company’s employees received

stock options Rights to buy a certain number of shares of stock at a specified price.

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MOTIVATING WITH A PROFIT-SHARING PLAN

HR How To

When London-based Happy Com- puters, an information technology training company, switched from individual bonuses to a profit- sharing plan, employees began thinking about how they could work together better for the entire company’s benefit. That change surprised and pleased the compa- ny’s chief executive. In fact, care- ful planning can deliver such happy results and avoid the pit- falls of profit-sharing and other incentive plans. Here are some ideas for setting up a profit-sharing plan that moti- vates employees:

• Get supervisors on board — Make sure they understand how the profit-sharing plan works and how they can lead their people to contribute to high profits. Find out what training they need, and make sure they get it.

• Make sure employees under- stand how the plan works — Give them opportunities to air

their concerns and ask ques- tions. Be prepared for questions about the plan’s fair- ness. Tell employees what goals they must reach and what the percentage payouts will be for meeting or exceed- ing the goals.

• Identify the behaviors and results that contribute to greater profi ts —Set group and individual goals that lead to these behaviors and results. Ensure that employ- ees and their supervisors have the training and resources necessary for meeting their goals.

• Make sure managers under- stand that they contribute to the profi t-sharing goals by encouraging their employees and keeping them focused on their goals —Some may need training in effective perfor- mance management.

• Consider linking rewards to the department’s or division’s

performance, if profi ts can be assigned to the group —That gives employees a sense that they have more control over the results, rather than depending on every division of a large company.

• Make the rewards big enough to matter —One expert recommends profit-sharing payments that are 20 to 33 percent of the employee’s base salary.

• Time the profi t-sharing payments for maximum effect —That may involve splitting the payout into two checks, delivered six months apart, so that employees have an incentive to stick around to enjoy the full reward.

Sources: Phil Shohet, “Inventive Incentive,” Accountancy Age, October 18, 2007; and “Employee Engagement: How to Avoid the Pitfalls of Performance Payments,” Employee Benefits , June 12, 2007, both downloaded from General Reference Center Gold, http://find. galegroup.com .

350

options to purchase the company’s stock at $10 per share. The employees will benefit if the stock price rises above $10 per share, because they can pay $10 for something (a share of stock) that is worth more than $10. If in 2010 the stock is worth $30, they can exercise their options and buy stock for $10 a share. If they want to, they can sell their stock for the market price of $30, receiving a gain of $20 for each share of stock.

Profit Sharing

Stock Options

Employee Stock

Ownership Plans (ESOPs)

Stock Ownership

Figure 12.4

Types of Pay for Organizational Performance

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CHAPTER 12 Recognizing Employee Contributions with Pay 351

Of course, stock prices can also fall. If the 2010 stock price is only $8, the employees would not bother to exercise the options. Traditionally, organizations have granted stock options to their executives. During the 1990s, many organizations pushed eligibility for options further down in the orga- nization’s structure. Wal-Mart and PepsiCo are among the large companies that have granted stock options to employees at all levels. Stock values were rising so fast during the 1990s that options were extremely rewarding for a time. Some studies suggest that organizations perform better when a large percentage of top and middle managers are eligible for long-term incentives such as stock options. This evidence is consistent with the idea of encouraging employees to think like owners. 25 It is not clear whether these findings would hold up for lower-level employees. They may see much less opportunity to influence the company’s performance in the stock market. Recent scandals have drawn attention to another challenge of using stock options as incentive pay. As with other performance measures, employees may focus so much on stock price that they lose sight of other goals, including ethical behavior. Ideally, managers would bring about an increase in stock price by adding value in terms of efficiency, innovation, and customer satisfaction. But there are other, unethical ways to increase stock price by tricking investors into thinking the organization is more valuable and more profitable than it actually is. Hiding losses and inflating the re- corded value of revenues are just two of the ways some companies have boosted stock prices, enriching managers until these misdeeds come to light. Also, officials at some companies, including Apple, Monster, and McAfee, have been charged with “back- dating” options granted to executives. This practice involves changing the date and/ or price in the original option agreement so that the option holder can buy stock at a bargain price—making the backdated option profitable or more profitable. At the same time, backdating eliminates or reduces the incentive to improve the stock’s per- formance. If backdating of options is kept secret, those who do it may be guilty of fal- sifying financial statements, which is unethical and may be illegal. 26

Employee Stock Ownership Plans While stock options are most often used with top man- agement, a broader arrangement is the employee stock ownership plan (ESOP). 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 over 3 million in 1980 to more than 11 million in 2008 in the United States. 27 Figure 12.5 shows the growth in the number of ESOPs in the United States. One reason for ESOPs’ popularity is that earnings of the trust holdings are exempt from income taxes. ESOPs raise a number of issues. On the negative side, they carry a significant risk for employees. By law, an ESOP must invest at least 51 percent of its assets in the company’s own stock (in contrast to other kinds of stock

employee stock ownership plan (ESOP) An arrangement in which the organization distributes shares of stock to all its employees by placing it in a trust.

SOURCE: National Center for Employee Ownership, “A Statistical Profile of Employee Ownership,” Research & Statistics page of NCEO Web site, updated February 2008, www.nceo.org .

2,000

6,000

10,000

12,000

4,000

8,000

Year

N u m

b e r

o f

P la

n s

1975 1980 1990 2000 2005 2007

Figure 12.5

Number of ESOPS

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funds that hold a wide diversity of companies). Problems with the company’s performance therefore can take away significant value from the ESOP. Many companies set up ESOPs to hold retirement funds, so these risks directly affect employees’ retirement income. Add- ing to the risk, funds in an ESOP are not guaranteed by the Pension Benefit Guarantee Corporation (described in Chapter 13). Sometimes employees use an ESOP to buy their company when it is experiencing financial problems; this is a highly risky investment. Still, ESOPs can be attractive to employers. Along with tax and financing advan- tages, ESOPs give employers a way to build pride in and commitment to the organiza- tion. Employees have a right to participate in votes by shareholders (if the stock is registered on a national exchange, such as the New York Stock Exchange). 28 This means employees participate somewhat in corporate-level decision making. Still, the overall level of participation in decisions appears to vary significantly among organi- zations with ESOPs. Some research suggests that the benefits of ESOPs are greatest when employee participation is greatest. 29 For an example of a company that uses ESOPs effectively, see the “ Best Practices ” box.

At Van Meter Industrial, employ- ees own every share of the com- pany’s stock. And each year, employees receive more shares, worth a few weeks’ pay. Van Meter, an electrical-parts distributor, offers this type of incentive to en- courage employees to act like owners, focused on the compa- ny’s long-term success. Several years ago, however, managers realized that the incen- tive might not be working as intended. At a companywide meet- ing, an employee grumbled that he didn’t care about the stock and would rather receive something more practical, say, “a couple hundred bucks” in bonus money to spend as he liked. Mick Slinger, the company’s chief financial officer, was startled. He had been watch- ing Van Meter’s stock price rise year after year, matching the infla- tion rate. He realized that while this steady climb looked valuable to him, many employees didn’t fully realize what it meant to be an employee owner. So under Slinger’s leadership, the company began to educate its

Van Meter Industrial’s Employees Act Like Owners

Best Practices

employees about company own- ership. The first step was to set up a 12-member employee commit- tee to learn about the ESOP and then share their knowledge. The committee studied enrollment procedures and the schedule for becoming fully vested in the plan. They met with employees at other employee-owned companies to learn how they were benefiting from their ESOPs. Then the com- mittee members began visiting Van Meter’s facilities to have in- formal discussions about the pro- gram. They developed practical, concrete lessons. For example, they pointed out that after 10 years, the rising value of company stock can make it worth five years’ earnings—equivalent to working for 10 years and getting 15 years’ pay. Management learned that employees more readily under- stand that focus—that a contribu- tion equals 9½ weeks’ pay instead of 18 percent of salary. Van Meter also built employee enthusiasm by treating the ESOP as a significant benefit. In the past, after employees had been with

the company for six months, they simply were told they were enrolled and that details of the ESOP were included in the infor- mation packets they had received when they joined the company. Now enrollment in the plan is celebrated with a jacket bearing the slogan “I am in,” coupled with training in employee ownership. Perhaps most important, the education also shows employees how their actions can cut costs, speed up debt collection, and boost the bottom line, adding to the worth of their stock. Employees meet once a month to talk about how they have helped to save the company money. Results are posted on Van Meter’s Web site for any employee to read. In the years since Van Meter began showing its employees how to think like owners, its stock price has jumped. Also, its em- ployee turnover has dropped from 18 percent to just 8 percent.

Source: Simona Covel, “How to Get Workers to Think and Act like Owners,” Wall Street Journal, February 7, 2008, http://online.wsj.com .

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CHAPTER 12 Recognizing Employee Contributions with Pay 353

Balanced Scorecard As the preceding descriptions indicate, any form of incentive pay has advantages and disadvantages. For example, relying exclusively on merit pay or other individual in- centives may produce a workforce that cares greatly about meeting those objectives but competes to achieve them at the expense of cooperating to achieve organizational goals. Relying heavily on profit sharing or stock ownership may increase cooperation but do little to motivate day-to-day effort or to attract and retain top individual per- formers. 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 an- other type. One way of accomplishing this goal is to design a balanced scorecard —a combina- tion of performance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay. A corporation would have financial goals to satisfy its stockholders (owners), quality- and price-related goals to satisfy its customers, efficiency goals to ensure better operations, and goals related to acquiring skills and knowledge for the future to fully tap into employees’ potential. Different jobs would contribute to those goals in different ways. For example, an engi- neer could develop products that better meet customer needs and can be produced more efficiently. The engineer could also develop knowledge of new technologies in order to contribute more to the organization in the future. A salesperson’s goals would include measures related to sales volume, customer service, and learning about prod- uct markets and customer needs. 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.

LO5 Describe how or- ganizations combine incentive plans in a “balanced scorecard.”

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

Tellabs is one company that uses a balanced scorecard. The company conducts quarterly meetings at which employees learn how their performance will be evaluated according to the scorecard. The company also makes this information available on the intranet.

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354 PART 4 Compensating Human Resources

Table 12.2 shows the kinds of information that go into a balanced scorecard. This scorecard for a manager in a manufacturing company includes four performance mea- sures. The financial performance measure is return on capital employed (that is, prof- its divided by capital used during the period). A higher percentage means the capital (money and equipment) generated more profits. The measure of customer satisfaction is product returns. If customers return 1 product out of 1,000, they are better satisfied than if they return 1 product out of 800. The measure of internal operations is the percentage by which the manager’s group reduces cycle time, the amount of time re- quired to complete the group’s process, such as fulfilling an order or getting a new product into production. Finally, the manager’s objective for learning and growth in the group is to reduce voluntary turnover among employees. This goal assumes that the manager can develop a more experienced, valuable group of employees by reduc- ing turnover. For each of these goals, the balanced scorecard assigns a target incentive payment for the manager to earn and four levels of performance. If the manager achieves the top level of performance, the manager will earn 150 percent of the target incentive. The payout would fall to 100 percent of the incentive for achieving the second level of performance, 50 percent of the incentive for achieving the third level, and nothing for achieving the bottom level. In this example, the manager’s target incentive is $2,000 per time period (e.g., per month), but the manager could earn $3,000 per period for exceeding all of the performance objectives—or nothing for failing to achieve all of the objectives.

INCENTIVE SCHEDULE

TARGET PERFORMANCE INCENTIVE PERFORMANCE % TARGET MEASURE PER MONTH LEVEL EARNED

Financial $ 1,000 20%1 150% • Return on capital employed 16–20% 100% 12–16% 50% Below 12% 0% Customer $ 400 1 in: 1 • Product returns 1,000 1 150% 900–999 100% 800–899 50% Below 800 0% Internal $ 300 9%+ 150% • Cycle time reduction (%) 6–9% 100% 3–6% 50% 0–3% 0% Learning and growth $ 300 Below 5% 150% • Voluntary employee turnover 5–8% 100% 8–12% 50% Total $ 2,000

Source: Adapted from F. C. McKenzie and M. P. Shilling, “Avoiding Performance Traps: Ensuring Effective Incentive Design and Implementation,” Compensation and Benefits Review, July–August 1998, pp. 57–65. Reprinted with permission of Sage Publications, Inc.

Table 12.2

Sample Balanced Scorecard for a Production Manager

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CHAPTER 12 Recognizing Employee Contributions with Pay 355

Not only does the balanced scorecard combine the advantages of different incentive- pay plans, it 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 12.2 , 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.

Processes That Make Incentives Work As we explained in Chapter 11, communication and employee participation can con- tribute to a belief that the organization’s pay structure is fair. In the same way, the pro- cess by which the organization creates and administers incentive pay can help it use incentives to achieve the goal of motivating employees. The monetary rewards of gainsharing, for example, can substantially improve productivity, 30 but the organiza- tion can set up the process to be even more effective. In a study of an automotive parts plant, productivity rose when the gainsharing plan added employee participa- tion in the form of monthly meetings with managers to discuss the gainsharing plan and ways to increase productivity. A related study asked employees what motivated them to participate actively in the plan (for example, by making suggestions for improvement). According to employees, other factors besides the pay itself were important—especially the ability to influence and control the way their work was done. 31

Participation in Decisions

Employee participation in pay-related decisions can be part of a general move toward employee empowerment. If employees are involved in decisions about incentive pay plans and employees’ eligibility for incentives, the process of creating and administer- ing these plans can be more complex. 32 There is also a risk that employees will make decisions that are in their interests at the expense of the organization’s interests. How- ever, employees have hands-on knowledge about the kinds of behavior that can help the organization perform well, and they can see whether individuals are displaying that behavior. 33 Therefore, in spite of the potential risks, employee participation can contribute to the success of an incentive plan. This is especially true when monetary incentives encourage the monitoring of performance and when the organization fos- ters a spirit of trust and cooperation.

Communication

Along with empowerment, communicating with employees is important. It demon- strates to employees that the pay plan is fair. Also, when employees understand the requirements of the incentive pay plan, the plan is more likely to influence their behavior as desired. 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 ru- mors and assumptions based on incomplete information, partly because of pay’s im- portance to employees. When making any changes, the human resource department should determine the best ways to communicate the reasons for the change. Some or- ganizations rely heavily on videotaped messages from the chief executive officer. Other means of communication include brochures that show examples of how

LO6 Summarize processes that can contribute to the success of incentive programs.

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employees will be affected. The human resource department may also conduct small- group interviews to learn about employees’ concerns, then address those concerns in the communications effort.

Incentive Pay for Executives Because executives have a much stronger influence over the organization’s perfor- mance than other employees do, incentive pay for executives warrants special atten- tion. Assuming that incentives influence performance, decisions about incentives for executives should have a great impact on how well the executives and the organiza- tion perform. Along with overall pay levels for executives (discussed in Chapter 11), organizations need to create incentive plans for this small but important group of employees. To encourage executives to develop a commitment to the organization’s long-term success, executive compensation often combines short-term and long-term incen- tives. Short-term incentives include bonuses based on the year’s profits, return on in- vestment, or other measures related to the organization’s goals. Sometimes, to gain tax advantages, the actual payment of the bonus is deferred (for example, by making it part of a retirement plan). Long-term incentives include stock options and stock pur- chase plans. The rationale for these long-term incentives is that executives will want to do what is best for the organization because that will cause the value of their stock to grow. Each year BusinessWeek publishes a list of top executives who did the most for their pay (that is, their organizations performed best) and those who did the least. The per- formance of the latter group has prompted much of the negative attention that execu- tive pay has received. The problem seems to be that in some organizations, the chief executive’s pay is high every year, regardless of the organization’s profitability or per- formance in the stock market. In terms of people’s judgments about equity, it seems fairer if high-paid executives must show results to justify their pay levels.

LO7 Discuss issues related to performance- based pay for executives.

356

eHRM

Employees get the most value from—and appreciation of—their benefits if they understand how to manage their financial assets. As employers are coming to ap- preciate this fact, they are also recognizing that online training is an efficient and convenient way to deliver a financial education. For example, GlaxoSmithKline offers financial education at each of its locations. For its diverse workforce, the pharmaceutical

company supplements face-to-face seminars with online instruction and downloadable presentations. This method of training is espe- cially useful for employees who work at home or frequently travel. Along with recorded training presentations on DVDs and pod- casts, online training offers the power of the computer for show- ing employees how to get the most out of their earnings. Online mod- eling tools can show employees

how the value of their stock can grow over time if they don’t sell it immediately. Or employees can see how the power of compound interest can make their bonus or profit-sharing check grow if they invest it in various ways.

Sources: “Best Practice: Face Up to Provision of Multi-Site Financial Education,” Employee Benefits, February 8, 2008; and “Financial Education: Cache of Literacy,” Employee Benefits, October 8, 2007, both downloaded from General Reference Center Gold, http://find.galegroup.com .

FINANCIAL EDUCATION ONLINE

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CHAPTER 12 Recognizing Employee Contributions with Pay 357

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. One way to achieve these goals is to tie a large share of executives’ pay to performance. In a BusinessWeek survey, almost 80 percent of chief executives’ pay came in the form of stock options and other incentive pay based on long-term performance objectives. Another study has found that relying on such long-term incentives is associated with greater profitability. 34

Performance Measures for Executives

The balanced-scorecard approach is useful in designing execu- tive pay. Whirlpool, for example, has used a balanced scorecard that combines measures of whether the organization is delivering value to shareholders, customers, and employees. These measures are listed in Table 12.3 . Rewarding achievement of a variety of goals in a balanced scorecard reduces the temptation to win bonuses by manipulating financial data. Regulators and shareholders have pressured companies to do a better job of linking executive pay and performance. The Securities and Exchange Commission (SEC) has required companies to more clearly report executive compensation levels and the company’s performance relative to that of com- petitors. These reporting requirements shine a light on situa- tions where executives of poorly performing companies receive high pay, so companies feel more pressure to link pay to performance. Some forms of incentive pay also have tax advantages. Under the Omnibus Budget Reconciliation Act of 1993, companies may not deduct executive pay that ex- ceeds $1 million, but performance-related pay (including stock options) is exempt, so it is deductible even over $1 million.

TYPE OF VALUE CREATION MEASURES Shareholder value Economic value added Earnings per share Cash flow Total cost productivity Customer value Quality Market share Customer satisfaction Employee value High-performance culture index High-performance culture deployment Training and development diversity

Source: E. L. Gubman, The Talent Solution (New York: McGraw-Hill, 1998).

Table 12.3

Balanced Scorecard for Whirlpool Executives

Warren Buffet must be doing something right. The billionaire once was ranked by BusinessWeek magazine as being the top executive who gave shareholders the most for their pay.

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Ethical Issues

Incentive pay for executives lays the groundwork for significant ethical issues. When an organization links pay to its stock performance, executives need the ethical back- bone to be honest about their company’s performance even when dishonesty or clever shading of the truth offers the tempting potential for large earnings. As recent scan- dals involving WorldCom, Enron, Global Crossing, and other companies have shown, the results can be disastrous when unethical behavior comes to light. Among these issues is one we have already touched on in this chapter: the diffi- culty of setting performance measures that encourage precisely the behavior desired. In the case of incentives tied to stock performance, executives may be tempted to in- flate the stock price in order to enjoy bonuses and valuable stock options. The intent is for the executive to boost stock value through efficient operations, technological innovation, effective leadership, and so on. Unfortunately, individuals at some com- panies determined that they could obtain faster results through accounting practices that stretched the norms in order to present the company’s performance in the best light. When such practices are discovered to be misleading, stock prices plunge and the company’s reputation is damaged, sometimes beyond repair. A related issue when executive pay includes stock or stock options is insider trad- ing. When executives are stockholders, they have a dual role as owners and managers. This places them at an advantage over others who want to invest in the company. An individual, a pension fund, or other investors have less information about the com- pany than its managers do—for example, whether product development is proceeding on schedule, whether a financing deal is in the works, and so on. An executive who knows about these activities could therefore reap a windfall in the stock market by buying or selling stock based on knowledge about the company’s future. The SEC places strict limits on this “insider trading,” but some executives have violated these limits. In the worst cases executives have sold stock, secretly knowing their company was failing, before the stock price collapsed. The losers are the employees, retirees, and other investors who hold the now-worthless stock. As recent news stories have reminded us, linking pay to stock price can reward unethi- cal behavior, at least in the short term and at least in the minds of a handful of execu- tives. Yet, given the motivational power of incentive pay, organizations cannot afford to abandon incentives for their executives. These temptations are among the reasons that executive positions demand individuals who maintain the highest ethical standards.

THINKING ETHICALLY

CAN EMPLOYEE STOCK OWNERSHIP SHAPE VALUES?

IMA Financial Group is entirely owned by its employ- ees. The insurance brokerage’s president, Bob Reiter, says making every employee an owner “has a profound impact not only on the way we operate but on how our clients feel.” The company hopes that its shared own- ership will build employees’ dedication to its mission, which is to “protect profits and make a difference.” That difference is defined as improvements in the lives of IMA’s clients, employees, and community. Reiter says IMA employees benefit from a climate of respect and trust in an organization focused less

on the competition than on ways to improve what it does. Clients benefit from service that goes beyond selling to help them manage their risk. And the com- munity benefits from IMA’s commitment to service projects and a foundation that supports local chari- ties. Recently, for all these efforts, IMA Group’s Colorado office won a Colorado Ethics in Business Alliance Award.

SOURCE: Rebecca Cole, “IMA Financial Group,” ColoradoBiz, 16th Annual Colorado Ethics in Business Alliance Awards, March 2008, downloaded from General Reference Center Gold, http://find.galegroup.com .

358 PART 4 Compensating Human Resources

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Questions

1. How does this description of IMA’s conduct com- pare with your own understanding of business ethics?

2. IMA president Bob Reiter explains employees’ commitment to the company’s values as being partly the result of their owning shares of IMA’s

CHAPTER 12 Recognizing Employee Contributions with Pay 359

stock. In what ways might employee stock owner- ship plans contribute to ethical conduct? In what circumstances would stock ownership plans effec- tively promote ethical conduct?

3. Could an employee stock ownership plan also contribute to unethical conduct in an organization? Why or why not?

SUMMARY

LO1 Discuss the connection between incentive pay and employee performance.

Incentive pay is pay tied to individual perfor- mance, profits, or other measures of success. Orga- nizations select forms of incentive pay to energize, direct, or control employees’ behavior. It is influen- tial because the amount paid is linked to predefined behaviors or outcomes. To be effective, incentive pay should encourage the kinds of behavior that are most needed, and employees must believe they have the ability to meet the performance standards. Employees must value the rewards, have the re- sources they need to meet the standards, and be- lieve the pay plan is fair.

LO2 Describe how organizations recognize individual performance.

Organizations may recognize individual perfor- mance through such incentives as piecework rates, standard hour plans, merit pay, sales commissions, and bonuses for meeting individual performance ob- jectives. 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 calcu- lated as a percentage of sales closed by a salesperson.

LO3 Identify ways to recognize group performance. Common group incentives include gainsharing,

bonuses, and team awards. Gainsharing programs, such as Scanlon plans, measure increases in pro- ductivity 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.

LO4 Explain how organizations link pay to their overall performance.

Incentives for meeting organizational objectives include profit sharing and stock ownership. Profit- sharing plans pay workers a percentage of the orga- nization’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. A stock option is the right to buy a certain number of shares at a specified price. The employee benefits by exercis- ing the option at a price lower than the market price, so the employee benefits when the company’s stock price rises. An employee stock ownership plan (ESOP) is an arrangement in which the orga- nization distributes shares of its stock to employees by placing the stock in a trust managed on the em- ployees’ behalf. When employees leave the organi- zation, they may sell their shares of the stock.

LO5 Describe how organizations combine incentive plans in a “balanced scorecard.”

A balanced scorecard is a combination of per- formance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay. Typically, it includes finan- cial 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. The mix of pay programs is intended to balance the dis- advantages of one type of incentive with the ad- vantages of another type. The balanced scorecard also helps employees to understand and care about the organization’s goals.

LO6 Summarize processes that can contribute to the success of incentive programs.

Communication and participation in decisions can contribute to employees’ feeling that the organization’s incentive pay plans are fair. Employee participation in pay-related decisions can be part of a general move toward employee empowerment. Employees may put their own interests first in

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developing the plan, but they also have firsthand in- sight into the kinds of behavior that can contribute to organizational goals. Communicating with em- ployees is important because it demonstrates that the pay plan is fair and helps them understand what is ex- pected of them. Communication is especially impor- tant when the organization is changing its pay plan.

LO7 Discuss issues related to performance-based pay for executives.

Because executives have such a strong influence over the organization’s performance, incentive pay

360 PART 4 Compensating Human Resources

for them receives special attention. Executive pay usually combines long-term and short-term incen- tives. By motivating executives, these incentives can significantly affect the organization’s perfor- mance. The size of incentives should be motivating but also meet standards for equity. Performance measures should encourage behavior that is in the organization’s best interests, including ethical be- havior. Executives need ethical standards that keep them from insider trading or deceptive practices de- signed to manipulate the organization’s stock price.

KEY TERMS

balanced scorecard, p. 353 commissions, p. 345 differential piece rates, p. 341 employee stock ownership plan

(ESOP), p. 351

gainsharing, p. 345 incentive pay, p. 339 merit pay, p. 342 piecework rate, p. 341 profit sharing, p. 348

Scanlon plan, p. 346 standard hour plan, p. 342 stock options, p. 349 straight piecework plan, p. 341

REVIEW AND DISCUSSION QUESTIONS

1. With some organizations and jobs, pay is primarily wages or salaries, and with others, incentive pay is more important. For each of the following jobs, state whether you think the pay should emphasize base pay (wages and salaries) or incentive pay (bonuses, profit sharing, and so on). Give a reason for each.

a. An accountant at a manufacturing company. b. A salesperson for a software company. c. A chief executive officer. d. A physician in a health clinic. 2. Consider your current job or a job that you have

recently held. Would you be most motivated in response to incentives based on your individual performance, your group’s performance, or the orga- nization’s overall performance (profits or stock price)? Why?

3. What are the pros and cons of linking incentive pay to individual performance? How can organizations address the negatives?

4. Suppose you are a human resource professional at a company that is setting up work teams for produc- tion and sales. What group incentives would you rec- ommend to support this new work arrangement?

5. Why do some organizations link incentive pay to the organization’s overall performance? Is it appropriate to use stock performance as an incentive for employ- ees at all levels? Why or why not?

6. Stock options have been called the pay program that “built Silicon Valley,” because of their key role as

incentive pay for employees in high-tech companies. They were popular during the 1990s, when the stock market was rising rapidly. Since then, stock prices have fallen.

a. How would you expect this change to affect employees’ attitudes toward stock options as incentive pay?

b. How would you expect this change to affect the effectiveness of stock options as an incentive?

7. Based on the balanced scorecard in Table 12.2 , what would be the total incentive paid to a manager if the group’s return on capital employed was 12 percent, customers returned 1 product out of every 1,200 products delivered, cycle time was reduced by 5 per- cent, and employee turnover was 4 percent? (For each measure, find the performance level, then mul- tiply the corresponding percentage by the target incentive to find the incentive earned.)

8. Why might a balanced scorecard like the one in Question 7 be more effective than simply using merit pay for a manager?

9. How can the way an organization creates and carries out its incentive plan improve the effectiveness of that plan?

10. In a typical large corporation, the majority of the chief executive’s pay is tied to the company’s stock price. What are some benefits of this pay strategy? Some risks? How can organizations address the risks?

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Big-name U.S. CEOs have taken a bath, but not the kind that leaves you feeling warm and relaxed. As the bears took over Wall Street, chief executives, rewarded hand- somely in years past with stock options, have seen the value of their holdings plummet. Market forces have chewed up the portfolios of even the savviest chief executives. Financial information pro- vider Capital IQ estimates that since October 2007, five CEOs of major U.S. companies have lost more than $1 bil- lion through holdings of their companies’ stock: Larry Ellison of Oracle, Michael Dell of Dell, Micky Arison of Carnival Corporation, Jeffrey Bezos of Amazon.com, and Rupert Murdoch of News Corporation. More than 20 CEOs have lost more than $100 mil- lion. The pain is widespread, too. Of the 450 major- company CEOs analyzed, only about 60 escaped the last three months without losses. The markets were so diffi- cult that only five of that group were able to achieve what these CEOs would typically take for granted—gains of more than $10 million each. The U.S. economy’s troubles began in the financial sector during the summer of 2007, as bad mortgage debt caused havoc in the credit markets. As a result, some of the biggest losers are CEOs in the financial sector. Coun- trywide Financial CEO Angelo Mozilo has seen his stock lose nearly two-thirds of its value, costing him more than $100 million. (Mozilo will step down as Countrywide’s chief after the planned acquisition of the company by Bank of America is completed.) Subprime debt has also devastated the holdings of CEOs of bond insurers. Don’t reach for the Kleenex just yet. Despite recent market turbulence, CEOs are still quite wealthy in com- pany stock. Capital IQ identified 16 CEOs who still own more than $1 billion in their firm’s shares and 73 who own more than $100 million. In the past, base salary was a much larger part of execu- tive compensation, but starting in the 1990s, corporate boards began to add a lot more stock to pay packages. Share- holder groups had argued that the interests of CEOs and shareholders weren’t properly aligned. By paying CEOs in

CHAPTER 12 Recognizing Employee Contributions with Pay 361

BUSINESSWEEK CASE

The Billion-Dollar Losers stock or stock options, “the concept is they get paid for the performance of the organization overall,” says Don Lindner of WorldatWork, a human resources nonprofit. But this doesn’t always work perfectly. When the economy is booming and the stock market is rising, even lackluster CEOs get rewarded. But now, while a recession threatens, CEOs of even top performers are hurt. For ex- ample, Amazon.com’s Bezos doubled profits in 2007, yet he lost $1.6 billion since October of that year. The list of CEOs includes a variety of executives who have somehow found a way to make money in a tough market. Their outperformance usually reflects extraordi- nary circumstances: surprisingly strong results that bucked an industry trend, or an outlook that suddenly turned from poor to favorable. Of course, in today’s volatile markets, the current win- ners could wind up in the company of their unlucky brethren in a heartbeat.

SOURCE : Excerpted from Ben Steverman, “The Billion-Dollar Losers,” BusinessWeek, February 4, 2008, downloaded from General Reference Center Gold, http://find.galegroup.com .

Questions 1. According to the case, when stock prices in general

are falling, the value of most CEOs’ compensation drops, whether or not particular CEOs are effective. How do you think this affects CEOs’ incentive to perform well? (For example, consider including other forms of performance-related pay.)

2. The opposite is true, too: when the stock market is rising, most CEOs’ compensation is growing, even if the CEOs are doing a mediocre or poor job. How can a compensation package that emphasizes stock be adjusted to keep executives motivated?

3. In employee-owned companies—notably, those us- ing ESOPs—all the employee-owners see their earn- ings rise and fall with the stock market. If you were an HR manager at an employee-owned company, how would you recommend that the company han- dle the possible effects on employees’ motivation?

CASE: XCEL ENERGY PAYS FOR EMPLOYEES WHO EXCEL

The management of Xcel Energy, an electricity and natural- gas utility based in Minneapolis and serving eight states, believes in linking rewards to performance. For example, an incentive plan called Xpress Ideas pays employees an immediate bonus for submitting beneficial suggestions.

The company’s employees loved the idea; in one year alone, they submitted 6,133 suggestions, and most of them were implemented—and rewarded. The downside of this plan is that Xcel Energy hadn’t set up a system for measuring whether the rewards were

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worth the money—more than $427,000 for the 6,133 ideas. So the company is trying to tie future rewards more closely to its strategy by focusing more on merit bonuses paid for a combination of individual, group, and corpo- rate performance. The company’s strategy is to be a top utility by “continuously improving our operations to be the lowest cost, most reliable and most environmentally sound energy provider.” If Xcel can excel at its merit-pay program, it will be far ahead of the average company. Typically, corporations try to keep everyone satisfied by spreading a rather small pool of merit pay fairly evenly across all employees. Recently, the average share of the payroll budget devoted to merit pay was just 4 percent. With a budget that size, at many companies, a top performer might get a bonus that is just 2 percentage points higher than that of an average worker. The average and poor workers might be happy, but the best people might actually be annoyed. One way Xcel is addressing this challenge is to chan- nel more of the merit-pay budget to nonmanagement em- ployees. Managers’ merit increases are limited to 2 percent, freeing more money for everyone else. Then it is urging managers to give bigger raises and bonuses to the best employees. Chief financial officer Ben Fowke says this arrangement is intended to “send a signal about how you can be rewarded if you’re a performer.” Xcel is also considering a long-term incentive plan for nonmanagement employees. Managers already can earn bonuses in the form of stock shares. The company may ex- tend the stock plan to employees who are not managers.

362 PART 4 Compensating Human Resources

As Xcel develops these programs, it is keeping issues of fairness in mind. An unfair compensation arrangement will fail as an incentive for good performance. One out- come is that when rising health care costs forced Xcel to begin deducting more for health insurance from employ- ees’ paychecks, the company also cut some perks for its executives, including medical coverage without a deduct- ible, free financial planning, and home security systems. Michael Connelly, Xcel’s vice president of human re- sources, explains the decision this way: “Employees un- derstand that executives are going to be paid more, but they also respond well when they see a company being consistent in its actions.”

SOURCE : Roy Harris, “Just Rewards,” CFO, February 2007, pp. 71–74; and Xcel Energy, “About Us,” Xcel Web site, www.xcelenergy.com , accessed February 25, 2008.

Questions 1. Based on the information given, do you agree with

management’s conclusion that merit pay can support Xcel’s strategy better than paying for suggestions? Why or why not?

2. How might Xcel continue to encourage suggestions as it aligns incentive pay more closely with its strat- egy? How do you think employees might react to these changes?

3. Imagine that Xcel has asked you to be a consultant advising on how to improve its merit pay system. Make three suggestions for ensuring that merit pay at Xcel is effective as an incentive.

IT’S A WRAP!

www.mhhe.com/noefund3e is your source for R eviewing, A pplying, and P racticing the concepts you learned about in Chapter 12.

Practice • Chapter quiz

Review • Chapter learning objectives • Narrated lecture and iPod

content • Test Your Knowledge: Reinforce-

ment Theory

Application • Video case and quiz: “A Motiva-

tion Convention in Chicago” • Self-Assessment: Test your

money-talk skills • Web Exercise: Inform yourself

on compensation and benefits management

NOTES

1. S. J. Wells, “No Results, No Raise,” HRMagazine, May 2005, downloaded from Infotrac at http://web6. infotrac.galegroup.com .

2. This chapter draws freely on several literature re- views: B. Gerhart and G. T. Milkovich, “Employee Compensation: Research and Practice,” in Handbook

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of Industrial and Organizational Psychology, 2nd ed., eds. M. D. Dunnette and L. M. Hough (Palo Alto, CA: Consulting Psychologists Press, 1992), vol. 3; and B. Gerhart and S. L. Rynes, Compensation: The- ory, Evidence, and Strategic Implications (Thousand Oaks, CA: Sage, 2003).

3. B. Gerhart and G. T. Milkovich, “Organizational Differences in Managerial Compensation and Finan- cial Performance,” Academy of Management Journal 33 (1990), pp. 663–91.

4. G. T. Milkovich and A. K. Wigdor, Pay for Performance (Washington, DC: National Academy Press, 1991); Gerhart and Milkovich, “Employee Compensation”; C. Trevor, B. Gerhart, and J. W. Boudreau, “Voluntary Turnover and Job Performance: Curvilinearity and the Moderating Influences of Salary Growth and Promotions,” Journal of Applied Psychology 82 (1997), pp. 44–61; Salamin and P. W. Horm, “In Search of the Elusive U-Shaped Performance-Turnover Relation- ship: Are High Performing Swiss Bankers More Likely to Quit?” Journal of Applied Psychology 90 (2005), pp. 1204–16; and C. B. Cadsby, F. Song, and F. Tapon, “Sorting and Incentive Effects of Pay-for-Performance: An Experimental Investigation,” Academy of Manage- ment Journal 50 (2007), pp. 387–405.

5. E. Tahmincioglu, “Gifts That Gall, Part 1 of 2,” Workforce Management, April 2004, downloaded from Infotrac at http://web7.infotrac.galegroup.com .

6. R. D. Bretz, R. A. Ash, and G. F. Dreher, “Do People Make the Place? An Examination of the Attraction- Selection-Attrition Hypothesis,” Personnel Psychology 42 (1989), pp. 561–81; T. A. Judge and R. D. Bretz, “Effect of Values on Job Choice Decisions,” Journal of Applied Psychology 77 (1992), pp. 261–71; and D. M. Cable and T. A. Judge, “Pay Performance and Job Search Decisions: A Person-Organization Fit Perspec- tive,” Personnel Psychology 47 (1994), pp. 317–48.

7. E. A. Locke, D. B. Feren, V. M. McCaleb, K. N. Shaw, and A. T. Denny, “The Relative Effectiveness of Four Methods of Motivating Employee Perfor- mance,” in Changes in Working Life, eds. K. D. Duncan, M. M. Gruenberg, and D. Wallis (New York: Wiley, 1980), pp. 363–88.

8. Gerhart and Milkovich, “Employee Compensation.” 9. E. E. Lawler III, “Pay for Performance: A Strategic

Analysis,” in Compensation and Benefits, ed. L. R. Gomez-Mejia (Washington, DC: Bureau of National Affairs, 1989); A. M. Konrad and J. Pfeffer, “Do You Get What You Deserve? Factors Affecting the Rela- tionship between Productivity and Pay,” Administra- tive Science Quarterly 35 (1990), pp. 258–85; J. L. Medoff and K. G. Abraham, “Are Those Paid More Really More Productive? The Case of Experience,” Journal of Human Resources 16 (1981), pp. 186–216;

CHAPTER 12 Recognizing Employee Contributions with Pay 363

and K. S. Teel, “Are Merit Raises Really Based on Merit?” Personnel Journal 65, no. 3 (1986), pp. 88–95.

10. F. Hansen, “Lackluster Performance,” Workforce Management, November 5, 2007, pp. 38–45; and Jack Welch and Suzy Welch, “Give Till It Doesn’t Hurt,” BusinessWeek, February 11, 2008, downloaded from General Reference Center Gold, http://find. galegroup.com .

11. R. D. Bretz, G. T. Milkovich, and W. Read, “The Current State of Performance Appraisal Research and Practice,” Journal of Management 18 (1992), pp. 321–52; R. L. Heneman, “Merit Pay Research,” Research in Personnel and Human Resource Manage- ment 8 (1990), pp. 203–63; and Milkovich and Wigdor, Pay for Performance.

12. Bretz et al., “Current State of Performance Appraisal Research.”

13. S. L. Rynes, B. Gerhart, and L. Parks, “Personnel Psychology: Performance Evaluation and Compensa- tion,” Annual Review of Psychology (2005).

14. W. E. Deming, Out of the Crisis (Cambridge, MA: Center for Advanced Engineering Study, Massachu- setts Institute of Technology, 1986), p. 110.

15. T. Chapelle, “Payday to Test Loyalty to the New Wachovia,” On Wall Street, November 1, 2007, downloaded from General Reference Center Gold, http://find.galegroup.com .

16. J. Bennett, “A Career on Commission Can Be a Hard Sell,” Chicago Tribune, March 24, 2002, sec. 5, p. 5.

17. T. L. Ross and R. A. Ross, “Gainsharing: Sharing Im- proved Performance,” in The Compensation Hand- book, 3rd ed., eds. M. L. Rock and L. A. Berger (New York: McGraw-Hill, 1991).

18. T. M. Welbourne and L. R. Gomez-Mejia, “Team In- centives in the Workplace,” in The Compensation Handbook, 3rd ed.

19. D. Harbrecht, “Baxter’s Harry Kraemer: ‘I Don’t Golf,’ ” BusinessWeek Online, March 28, 2002, www. xcelenergy.com (interview with Harry Kraemer Jr.).

20. L. R. Gomez-Mejia and D. B. Balkin, Compensation, Organizational Strategy, and Firm Performance (Cin- cinnati: South-Western, 1992).

21. J. A. Fossum, Labor Relations (New York: McGraw- Hill, 2002).

22. This idea has been referred to as the “share economy.” See M. L. Weitzman, “The Simple Macroeconomics of Profit Sharing,” American Economic Review 75 (1985), pp. 937–53. For supportive research, see the following studies: J. Chelius and R. S. Smith, “Profit Sharing and Employment Stability,” Industrial and Labor Relations Review 43 (1990), pp. 256S–73S; B. Gerhart and L. O. Trevor, “Employment Stability under Different Mana- gerial Compensation Systems,” working paper (Cor- nell University Center for Advanced Human Resource

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Studies, 1995); D. L. Kruse, “Profit Sharing and Em- ployment Variability: Microeconomic Evidence on the Weitzman Theory,” Industrial and Labor Relations Review 44 (1991), pp. 437–53.

23. Gerhart and Milkovich, “Employee Compensation”; M. L. Weitzman and D. L. Kruse, “Profit Sharing and Productivity,” in Paying for Productivity, ed. A. S. Blinder (Washington, DC: Brookings Institution, 1990); D. L. Kruse, Profit Sharing: Does It Make a Dif- ference? (Kalamazoo, MI: Upjohn Institute, 1993); and M. Magnan and S. St.-Onge, “The Impact of Profit Sharing on the Performance of Financial Ser- vices Firms,” Journal of Management Studies 42 (2005), pp. 761–91.

24. Jan Norman, “Engineering Firm Makes Layoffs the Last Option,” Orange County Register, March 23, 2005, downloaded from Infotrac at http://web7. infotrac.galegroup.com .

25. Gerhart and Milkovich, “Organizational Differences in Managerial Compensation.”

26. Arik Hesseldahl, “The SEC Subpoenas Jobs over Backdating,” BusinessWeek Online, September 21, 2007, downloaded from General Reference Center Gold, http://find.galegroup.com ; and S. Reisinger, “It’s What You Know,” Corporate Counsel, January 2008, p. 17 (interview with John Villa). See also S. Reisinger, “Feds Look to Send First GC to Trial on Backdating,” Fulton County Daily Report, January 23, 2008, http://find.galegroup.com .

27. National Center for Employee Ownership, “A Sta- tistical Profile of Employee Ownership,” Research & Statistics page of NCEO Web site, updated February 2008, www.nceo.org .

364 PART 4 Compensating Human Resources

28. M. A. Conte and J. Svejnar, “The Performance Ef- fects of Employee Ownership Plans,” in Paying for Productivity, pp. 245–94.

29. Ibid.; T. H. Hammer, “New Developments in Profit Sharing, Gainsharing, and Employee Ownership,” in Productivity in Organizations, eds. J. P. Campbell, R. J. Campbell, et al. (San Francisco: Jossey-Bass, 1988); and K. J. Klein, “Employee Stock Ownership and Employee Attitudes: A Test of Three Models,” Jour- nal of Applied Psychology 72 (1987), pp. 319–32.

30. R. T. Kaufman, “The Effects of Improshare on Pro- ductivity,” Industrial and Labor Relations Review 45 (1992), pp. 311–22; M. H. Schuster, “The Scanlon Plan: A Longitudinal Analysis,” Journal of Applied Behavioral Science 20 (1984), pp. 23–28; and J. A. Wagner III, P. Rubin, and T. J. Callahan, “Incentive Payment and Nonmanagerial Productivity: An In- terrupted Time Series Analysis of Magnitude and Trend,” Organizational Behavior and Human Decision Processes 42 (1988), pp. 47–74.

31. C. R. Gowen III and S. A. Jennings, “The Effects of Changes in Participation and Group Size on Gain- sharing Success: A Case Study,” Journal of Organiza- tional Behavior Management 11 (1991), pp. 147–69.

32. D. I. Levine and L. D. Tyson, “Participation, Produc- tivity, and the Firm’s Environment,” in Paying for Productivity.

33. T. Welbourne, D. Balkin, and L. Gomez-Mejia, “Gainsharing and Mutual Monitoring: A Combined Agency–Organizational Justice Interpretation,” Acad- emy of Management Journal 38 (1995), pp. 881–99.

34. Gerhart and Milkovich, “Organizational Differences in Managerial Compensation.”

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