Session 4 Traditional Basis For Pay k37

Traditional Basis for Pay – seniority and Merit Chapter 4

Chapter Road Map •     •        

Seniority and longevity pay Effectiveness of seniority pay systems Design of seniority and longevity pay systems Advantages of seniority pay systems Fitting seniority pay with competitive strategies Merit Pay Elements of Merit Pay Performance management systems Methods of appraising employees Sources of Performance Appraisal Information Errors in Performance appraisal Process Strengthening the pay –for – performance link Limitations of merit pay programs Linking Merit pay with competitive strategy

Seniority and Longevity Pay • Seniority or longevity pay systems reward employees with periodic additions to base pay according to employees’ length of service in performing their jobs. • The rationale comes from human capital theory which states that employees’ knowledge and skills generate productive capital known as human capital • Employees can develop such knowledge and skills from formal education and training including on-the-job experience • Over time, employees presumably refine existing skills or acquire new ones that enable them to work more productively • Thus, seniority pay rewards employees for acquiring and refining their skills as indexed by seniority

Seniority and Longevity Pay • Historical Overview  President Franklin D. Roosevelt advocated policies designed to improve workers’ economic status in response to economic depression of 1929  Congress instituted National Labor Relations Act (NLRA) in 1935 to protect workers right  NLRA established a collective bargaining system to accommodate employers’ and employees’ partially conflicting and partially shared goals  Collective bargaining led to job control unionism,  collective bargaining units negotiate formal contracts with employees  provide quasi-judicial grievance procedures to adjust disputes between union and employers

Seniority and Longevity Pay  In a unionized work places, of collective bargaining agreements may determine the type of seniority system used  Seniority system tend to be deciding factor in nearly all job scheduling, transfer, lay offs, compensation , and promotion decisions  Political pressures probably drive the prevalence of public sector seniority pay  Seniority – based pay system essentially provide automatic pay increases  Performance assessment tend to be subjective rather than objective because accurate job performance measurement are very difficult to obtain  In contrast employees’ seniority is easily indexed  Implementing such a system that specifies the amount of pay raise an employee will receive according to seniority is automatic  Politically, “automatic “ pay increases protect public sector employees from the quirks of election-year politics  The federal, state (provincial) governments can avoid direct responsibility for pay raises, so employees can receive fair pay without political objections

Seniority and Longevity Pay • Who Participates?  Approximately private sector union workers, mainly: a. Rank and file b. Clerical  Government workers a. All levels i. Municipal ii. State iii. Federal b. Most positions i. istration ii. Professional iii. Managerial

Seniority and Longevity Pay • Effectiveness of Seniority Pay Systems 1. Little systematic research demonstrates seniority pay system plans’ effectiveness 2. Will probably disappear from for-profit companies in the future due to: a. Increased global competition b. Rapid technological advances c. Skill deficits of new and current workers d. Aging “baby boomer” generation which would make these plans cost-prohibitive

Seniority and Longevity Pay • Design of Seniority Pay and Longevity Pay Plans Seniority pay a. Object is to reward job tenure through permanent increases to base salary b. Employees start at set base pay, then receive time-designated pay increases c. Employees can reach a maximum pay level for a position, but are expected to be promoted and qualify for a new, higher pay structure 2. Longevity pay a. Rewards employees who have reached pay grade maximums and who are not likely to move into higher grades b. Can take the form of a percentage of base pay, a flat dollar amount, or a special step increase based on the number of years the employee has spent with the organization

Seniority and Longevity Pay • Advantages of Seniority Pay Plans 1. Employees may perceive that they are treated fairly because they earn pay increases by an objective standard instead of supervisory judgment 2. Set pay increases facilitate the istration of pay programs for employers 3. Avoids the perception, by employees, of favoritism

Seniority and Longevity Pay • Fitting Seniority Pay with Competitive Strategies 1. Seniority pay does not fit well with the imperatives of competitive strategies because employees can count on receiving the same pay raises regardless of performance 2. With the exception of companies that are shielded from competitive pressures (e.g., public utilities), it is likely that companies that intend to remain competitive will set aside seniority pay practices . 3. Although seniority pay plans reflect employees' increased worth, they measure such contributions indirectly, rather than based on tangible contributions or the successful acquisition of job-related knowledge

Merit Pay Plans 1. Pay programs that assume that employees' compensation over time should be determined, at least in part, by differences in job performance 2. Permanent increases are based on performance 3. Reward excellent effort or results 4. Motivate future performance 5. Help employers retain valued employees

Merit Pay Plans • Exploring the Elements of Merit Pay 1. Based on objective and subjective indicators of an employee’s job performance 2. Periodic review, by supervisors, of employees' job performance compared to performance standards and goals 3. Accurate performance appraisals are key to effective merit pay programs 4. To be effective, standards and goals must be realistic and employees must be prepared to meet job goals with respect to their skills and abilities 5. Employees must perceive a strong relationship between attaining performance standards and pay increases

Merit Pay Plans • Exploring the Elements of Merit Pay  Important considerations for deciding on using merit pay a. That adequate funds are available to fulfill promises to compensate employees b. Adjustments to base pay should be made according to changes in the cost of living or inflation before awarding merit pay raises c. Is there a commitment for merit pay from top management? d. Is the job design conducive to making merit pay effective in improving or maintaining job performance levels? e. Do employees have control over their performance without outside influences that can affect the attainment of performance goals f. Have employers set explicit performance standards that specify the procedures or outcomes against which employees' job performance can be clearly evaluated?

Performance Management system • Performance management is the systematic process by which an organization involves its employees, as individuals and of a group, in improving organizational effectiveness in the accomplishment of organizational mission and goals.

Performance Management System

Performance Management • In an effective organization, work is planned out in advance. • Planning means setting performance expectations and goals for groups and individuals to channel their efforts toward achieving organizational objectives. • Getting employees involved in the planning process will help them understand the goals of the organization, what needs to be done, why it needs to be done, and how well it should be done. • The requirements for planning employees' performance include establishing the elements and standards of their performance appraisal plans.

Performance Management • Performance elements and standards should be measurable, understandable, verifiable, equitable, and achievable. • Through critical elements, employees are held able as individuals for work assignments or responsibilities. • Employee performance plans should be flexible so that they can be adjusted for changing program objectives and work requirements. • When used effectively, these plans can be beneficial working documents that are discussed often, and not merely paperwork that is filed in a drawer and seen only when ratings of record are required

Performance Management • In an effective organization, assignments and projects are monitored continually. • Monitoring well means consistently measuring performance and providing ongoing to employees and work groups on their progress toward reaching their goals. • Requirements for monitoring performance include conducting progress reviews with employees where their performance is compared against their elements and standards. • Ongoing monitoring provides the opportunity to check how well employees are meeting predetermined standards and to make changes to unrealistic or problematic standards. • By monitoring continually, unacceptable performance can be identified at any time during the appraisal period and assistance provided to address such performance rather than wait until the end of the period when summary rating levels are assigned

Performance Management • In an effective organization, employee developmental needs are evaluated and addressed. • Developing in this instance means increasing the capacity to perform through training, giving assignments that introduce new skills or higher levels of responsibility, improving work processes, or other methods. • Providing employees with training and developmental opportunities encourages good performance, strengthens job-related skills and competencies, and helps employees keep up with changes in the workplace, such as the introduction of new technology. • Carrying out the processes of performance management provides an excellent opportunity to identify developmental needs. • During planning and monitoring of work, deficiencies in performance become evident and can be addressed. Areas for improving good performance also stand out, and action can be taken to help successful employees improve even further

Performance Management • From time to time, organizations find it useful to summarize employee performance. • This can be helpful for looking at and comparing performance over time or among various employees. • Organizations need to know who their best performers are. • Within the context of formal performance appraisal requirements, rating means evaluating employee or group performance against the elements and standards in an employee's performance plan and asg a summary rating of record. • The rating of record is assigned according to procedures included in the organization's appraisal program. • It is based on work performed during an entire appraisal period. • The rating of record has a bearing on various other personnel actions, such as granting within-grade pay increases and determining additional retention service credit in a reduction in force. • Note: Although group performance may have an impact on an employee's summary rating, a rating of record is assigned only to an individual, not to a group.

Performance Management • Rewarding means recognizing employees, individually and as of groups, for their performance and acknowledging their contributions to the organization’s mission. • A basic principle of effective management is that all behavior is controlled by its consequences. • Those consequences can and should be both formal and informal and both positive and negative. • Good performance is recognized without waiting for nominations for formal awards to be solicited. • Recognition is an ongoing, natural part of day-to-day experience. A lot of the actions that reward good performance — like saying "Thank you" — don't require a specific regulatory authority. • Nonetheless, awards regulations provide a broad range of forms that more formal rewards can take, such as cash, time off, and many nonmonetary items. The regulations also cover a variety of contributions that can be rewarded, from suggestions to group accomplishments.

Performance Appraisal • A performance appraisal, is a method by which the job performance of an employee is evaluated (generally in of quality, quantity, cost, and time) typically by the corresponding manager or supervisor • It is the process of obtaining, analyzing, and recording information about the relative worth of an employee to the organization. • Performance appraisal is an analysis of an employee's recent successes and failures, personal strengths and weaknesses, and suitability for promotion or further training. • It is also the judgment of an employee's performance in a job based on considerations other than productivity alone.

Types of Performance Appraisal Systems •   •    •    •    • •

Trait Based Approaches Graphic Rating Scales Check List Comparative Methods Ranking Method Paired Comparison Forced Distribution Narrative Methods CRITICAL INCIDENT ESSAY FIELD REVIEW BEHAVIORAL RATING APPROACHES Behaviorally anchored rating scales (BARS), Behavioral observation scales (BOS), Behavioral expectation scales (BES). Management by Objectives (MBO) 360 degree performance appraisal

Trait Based Approaches • Graphic rating scales • The Rating Scale is a form on which the manager simply checks off the employee’s level of performance. • This is the oldest and most widely method used for performance appraisal. • The scales may specify five points, so a factor such as job knowledge might be rated 1 (poorly informed about work duties) to 5 (has complete mastery of all phases of the job).

Trait Based Approaches • •          

Graphic rating scales (contd.) Content of appraisal Quantity of work. Volume of work under normal working conditions, Quality of work. Neatness, thoroughness and accuracy of work Knowledge of job. Dependability, Conscientious, thorough, reliable, accurate, Judgment attitude. Exhibits enthusiasm and cooperativeness on the job Cooperation . Willingness and ability to work with others to produce desired goals. Initiative. Decisiveness , Communication skills Leadership

Trait Based Approaches • •       •   •  

Graphic rating scales (contd.) .Rating scales Rating scales can include 5 elements as follows: Unsatisfactory Fair Satisfactory Good Outstanding Advantages of the rating scales Graphic rating scales are less time consuming to develop. They also allow for quantitative comparison. Disadvantages of the rating scales Different supervisors will use the same graphic scales in slightly different ways One way to get around the ambiguity inherent in graphic rating scales is to use behavior based scales, in which specific work related behaviors are assessed  More validity comparing workers ratings from a single supervisor than comparing two workers who were rated by different supervisors.

Trait Based Approaches • CHECKLIST  The checklist is composed of a list of statements or words. Raters check statements most representative of the characteristics and performance of employees.  The following are typical checklist statements:  ________ can be expected to finish work on time  ________ seldom agrees to work overtime  ________ is cooperative and helpful  ________ accepts criticism  ________ strives for self-improvement  The checklist can be modified so that varying weights are assigned to the statements or words. The results can then be quantified • Usually, the weights are not known by the rating supervisor because they are tabulated by someone else, such as a member of the HR unit.

Trait Based Approaches • CHECKLIST (Contd.)  There are several difficulties with the checklist: (1) as with the graphic rating scale, the words or statements may have different meanings to different raters (2)raters cannot readily discern the rating results if a weighted checklist is used; (3) raters do not assign the weights to the factors.

Comparative Methods • Comparative methods require that managers directly compare the performance of their employees against one another. • For example, a data-entry operator’s performance would be compared with that of other data-entry operators by the computing supervisor. • Comparative techniques include ranking, paired comparison, and forced distribution

Comparative Methods • Performance ranking Method  The ranking method consists of listing all employees from highest to lowest in performance  The primary drawback of the ranking method is that the size of the differences among individuals is not well defined  For example, there may be little difference in performance between individuals ranked second and third, but a big difference in performance between those ranked third and fourth  This drawback can be overcome to some extent by asg points to indicate the size of the gaps  Ranking also means that someone must be last. It is possible that the last-ranked individual in one group would be the top employee in a different group  Ranking becomes very unwieldy if the group to be ranked is very large.

Comparative Methods • Performance ranking Method • Rating scale of ranking Much better – 5 points Slightly better – 4 points  Equal – 3 points  Slightly worst – 2 points Much worst – 1 point

A paired Comparison Performance Appraisal Rating Form Instruction: Please indicate by placing an X which employee of each pair has performed more effectively during the past year __X__ Bob Brown ____ Mary Green __X___ Bob Brown _____ Jim Smith ____ Bob Brown _X___ Allen Jones

__X___ Mary Green _____ Jim Smith _____ Mary Green __X___ Allen Jones _____ Jim Smith ___X___ Allen Jones

In the example Allen Jones is the best performer because he was identified most often as the best performer, followed by Bob Brown, (identified twice as better performer) and Mary Green ( identified once as a best performer )

Comparative Methods • Paired Comparison Method  Supervisor compare each employee to to every other employee  Identifying the better performer in each pair Following the comparison, the employee are ranked according to the number of times they were identified as being the better performer  Suited for small group of employees performing similar jobs • Advantages and disadvantages of paired comparison analysis  It is useful where priorities are not clear.  It is particularly useful where you do not have objective data to base this on.  It helps you to set priorities where there are conflicting demands on your resources.  This makes it easy to choose the most important problem to solve, or select the solution that will give you the greatest advantage

Comparative Methods • FORCED DISTRIBUTION • Performance appraisal method in which ratings of employees’ performance are distributed along a bellshaped curve. • This method assumes that the widely known bell-shaped curve of performance exists in a given group • The top-ranked employees are considered “high-potential” employees and are often targeted for a more rapid career and leadership development programs • In contrast, those ranked at the bottom are denied bonuses and pay increases. They may be given a probationary period to improve their performance .

Comparative Methods • FORCED DISTRIBUTION (Contd.) • Advantages:  They force reluctant managers to make difficult decisions and identify the most and least talented of the work group  They create and sustain a high performance culture in which the workforce continuously improves • Disadvantages  They increase unhealthy cut-throat competitiveness  They discourage collaboration and teamwork;  They harm morale;  They are legally suspect giving rise to age discrimination cases

Forced Distribution on a Bell-Shaped Curve

Narrative Methods Managers and HR specialists frequently are required to provide written appraisal information Documentation and description are the essence of the critical incident, the essay, and the field review methods • These records describe an employee’s actions rather than indicating an actual rating

Narrative Methods • CRITICAL INCIDENT  The manager keeps a written record of both highly favorable and unfavorable actions in an employee’s performance.  When a “critical incident” involving an employee occurs, the manager writes it down.  A list of critical incidents is kept during the entire rating period for each employee.  The critical incident method can be used with other methods to  Document the reasons why an employee was rated in a certain way. • Disadvantages of critical Incident  Negative incidents may be more noticeable than positive incidents.  It results in very close supervision which may not be liked by the employee.  The recording of incidents may be a chore for the manager concerned, who may be too busy or forget to do it.  The supervisors have a tendency to unload a series of complaints about incidents during an annual performance review session.

Narrative Methods • Essay evaluation  This method asked managers / supervisors to describe strengths and weaknesses of an employee’s behavior. Essay evaluation is a non-quantitative technique  This method usually combined with other method.

• Input of information sources  Job knowledge and potential of the employee;  Employee’s understanding of the company’s programs, policies, objectives, etc.;  The employee’s relations with co-workers and superiors;  The employee’s general planning, organizing and controlling ability;  The attitudes and perceptions of the employee, in general

Narrative Methods • Essay evaluation (contd.) • Disadvantages of essay evaluation  Manager / supervisor may write a biased essay.  A busy rater may write the essay hurriedly without properly assessing the actual performance of the worker.  Apart from that, rater takes a long time, this becomes uneconomical from the view point of the firm, because the time of rater is costly.  Some evaluators may be poor in writing essays on employee performance.  Others may be superficial in explanation and use flowery language which may not reflect the actual performance of the employee.

Essay evaluation form . Please give examples of the employee’s ineffective behavior ——– ——– 2. Please give examples of the employee’s effective behavior ——– ——– 3. What steps have been taken (or will be taken) to modify ineffective behavior? ——– ——– 4. What are additional comments related to the conditions and circumstances of effective/ineffective behavior? ——– ——– 5. Does the jobholder’s job description need revision? And how to? ——– ——– 6. Jobholder’s comments ——– ——–

• FIELD REVIEW  The field review has as much to do with who does the evaluation as the method used.  This approach can include the HR department as a reviewer, or a completely independent reviewer outside the organization  In the field review, the outside reviewer becomes an active partner in the rating process  The outsider interviews the manager about each employee’s performance, then compiles the notes from each interview into a rating for each employee.  Then the rating is reviewed by the supervisor for needed changes.

 This method assumes that the outsider knows enough about the job setting to help supervisors give more accurate and thorough appraisals.  This method assumes that the outsider knows enough about the job setting to help supervisors give more accurate and thorough appraisals.  The major limitation of the field review is that the outsider has a great deal of control over the rating. Managers may see it as a challenge to their authority  In addition, the field review can be time consuming, particularly if a large number of employees are to be rated.

BEHAVIORAL RATING APPROACHES • Attempt to assess an employee’s behaviors instead of other characteristic • Some of the different behavioral approaches are behaviorally anchored rating scales (BARS), behavioral observation scales (BOS), and behavioral expectation scales (BES). • BARS match descriptions of possible behaviors with what the employee most commonly exhibits. • BOS are used to count the number of times certain behaviors are exhibited. • BES order behaviors on a continuum to define outstanding, average, and unacceptable performance • BARS were developed first and are used here as an example of behavioral rating approaches • Behavioral rating approaches describe examples of employee job behaviors • These examples are “anchored,” or measured, against a scale of performance levels.

Behaviorally anchored rating scales • CONSTRUCTING BEHAVIORAL SCALES • Construction of a behavioral scale begins with identifying important job dimensions • These dimensions are the most important performance factors in an employee’s job description • For example, for a college professor, the major job dimensions associated with teaching might be (a)course organization, (b) attitude toward students, (c) fair treatment, and (d) competence in subject area. • Short statements, similar to critical incidents, are developed that describe both desirable and undesirable behaviors (anchors) • Then they are “retranslated,” or assigned to one of the job dimensions • This task is usually a group project, and assignment to a dimension usually requires the agreement of 60% to 70% of the group.

Example behaviors of a telephone customer service representative taking orders for a national catalog retailer

Development Process for Behavioral Anchors

Behaviorally anchored rating scales • Problems: 1. Developing and maintaining behaviorally anchored rating scales require extensive time and effort 2. In addition, several appraisal forms are needed to accommodate different types of jobs in an organization 3. Separate BARS forms would need to be developed for each distinct job.

Management by Objectives (MBO) • Specifies the performance goals that an individual hopes to attain within an appropriate length of time • The objectives that each manager sets are derived from the overall goals and objectives of the organization • MBO should not be a disguised means for a superior to dictate the objectives of individual managers or employees. • Other names for MBO include appraisal by results, target-coaching, work planning and review, performance objectives, and mutual goal setting.

Management by Objectives (MBO) • KEY MBO IDEAS • Three key assumptions underlie an MBO appraisal system 1. If an employee is involved in planning and setting the objectives and determining the measure, a higher level of commitment and performance may result. 2. If the objectives are identified clearly and precisely, the employee will do a better job of achieving the desired result 3. Performance objectives should be measurable and should define results. Objectives are composed of specific actions to be taken or work to be accomplished. • Sample objectives might include:  Submit regional sales report by the fifth of every month.  Obtain orders from at least five new customers per month.  Maintain payroll costs at 10% of sales volume.  Have scrap loss of less than 5%.  Fill all organizational vacancies within 30 days after openings occur

Management by Objectives (MBO) • THE MBO PROCESS • Implementing a guided self-appraisal system using MBO is a fourstage process. 1. Job review and agreement: The employee and the superior review the job description and the key activities that comprise the employee’s job. The idea is to agree on the exact makeup of the job. 2. Development of performance standards: Specific standards of performance must be mutually developed. In this phase a satisfactory level of performance that is specific and measurable is determined., 3. Guided objective setting: Objectives are established by the employee in conjunction with, and guided by, the superior 4. Continuing performance discussions: The employee and the superior use the objectives as bases for continuing discussions about the employee’s performance. Although a formal review session may be scheduled, the employee and the manager do not necessarily wait until the appointed time to discuss performance.

MBO Process

Management by Objectives (MBO) • MBO CRITIQUE • No management tool is perfect, and certainly MBO is not appropriate for all employees or all organizations • Jobs with little or no flexibility are not compatible with MBO. (For example, an assembly-line worker) • The MBO process seems to be most useful with managerial personnel and employees who have a fairly wide range of flexibility and control over their jobs. • When imposed on a rigid and autocratic management system, MBO may fail

360 degree performance appraisal • In the formatted from of 360-degree performance appraisals, the performance of an employee will be assessed based on ideas of many other different people, for example customers, suppliers, peers and direct reports • In case of using 360-degree performance appraisal, it is vital that the process be implemented by the manager of Human Resources Department so that the subordinate reviewers (or staff) are made sure that all their assessments on performance are kept anonymous • 360 degree appraisal has four components: • Self appraisal • Subordinate’s appraisal • Peer appraisal. • Superior’s appraisal

360 degree performance appraisal • What’s 360 degree measures? • 360 degree measures manners and capacities. • 360 degree improves such skills as listening, planning and goal-setting. • 360 degree concentrates on subjective areas, for example efficiencies of teamwork character, and leadership. • 360 degree supplies on the way others think about a specific staff.

360 degree performance appraisal • Advantages of 360 degree appraisal  Offer a more comprehensive view towards the performance of employees.  Improve credibility of performance appraisal.  Such colleague’s will help strengthen self-development.  Increases responsibilities of employees to their customers.  The mix of ideas can give a more accurate assessment.  Opinions gathered from lots of staff are sure to be more persuasive.  Not only manager should make assessments on its staff performance but other colleagues should do, too.  People who undervalue themselves are often motivated by from others.  If more staff takes part in the process of performance appraisal, the organizational culture of the company will become more honest.

360 degree performance appraisal • Disadvantages of 360 degree appraisal  Taking a lot of time, and being complex in istration  Extension of exchange can cause troubles and tensions to several staff.  There is requirement for training and important effort in order to achieve efficient working.  It will be very hard to figure out the results.  can be useless if it is not carefully and smoothly dealt.  Can impose an environment of suspicion if the information is not openly and honestly managed

Multisource Appraisal

Combinations of Methods • There is no one best appraisal method • Research has suggested that the method used does not change the accuracy or solve rater errors • A performance measurement system that uses a combination of the preceding methods is possible and may be sensible in certain circumstances. • Consider combinations to offset the following advantages and disadvantages: • Category rating (trait) methods are easy to develop, but they usually do little to measure strategic accomplishments. Further, they may make inter-rater reliability problems worse

Combinations of Methods • Comparative approaches help reduce leniency, central tendency, and strictness errors, which makes them useful for istrative decisions such as pay raises. But the comparative approaches do a poor job of linking performance to organizational goals, and they do not provide for improvement as well as other methods • Narrative methods work best for development because they potentially generate more information. However, without good definitions of criteria or standards, they can be so unstructured as to be of little value. Also, these methods are poor for istrative uses. • The behavioral/objective approaches work well to link performance to organizational goals, but both can require much more effort and time to define expectations and explain the process to employees. These approaches may not work well for lower-level jobs.

Combinations of Methods • When managers can articulate what they want a performance appraisal system to accomplish, they can choose and/or mix the methods just mentioned to get the combinations of advantages they want • For example, one combination might include a graphic rating scale of performance on major job criteria, a narrative of developmental needs, and an overall ranking of employees in a department. • Different categories of employees (e.g., salaried exempt, non exempt salaried, maintenance) might require different combinations

Four Activities to Promote NonDiscriminatory Performance Appraisal Practices

• Conduct job analyses to ascertain characteristics necessary for a content valid performance appraisal system a. Accurately define parameters of the job b. Define behaviors necessary to perform the job effectively c. Content validity displays the connection between a. and b. (above) d. Periodically review the appraisal instrument for validity

Four Activities to Promote NonDiscriminatory Performance Appraisal Practices 2. Incorporate these characteristics into a rating instrument 3. Train supervisors to use the rating instrument properly 4. Set-up formal appeal mechanisms and have upper-level personnel review the ratings to insure accuracy and effectiveness

Errors in the Performance Appraisal Process 1. Rating errors reflect differences between human judgment processes versus objective, accurate assessments uncolored by bias, prejudice, or other subjective, extraneous influences 2. Rating errors occur because raters must make subjective judgments 3. Most common types of raters’ errors include: a. Bias errors b. Contrast errors c. Errors of central tendency d. Errors of leniency or strictness

Bias errors

• Happen when rater evaluates employees based on a negative or positive opinion of the employee rather than on the employee’s actual performance • First-impression effect —a manager would have a tendency to make an initially favorable or unfavorable judgment about an employee, and then ignore or distort the employee’s actual performance based on this impression • Positive halo effect —rater generalizes good behavior on one aspect of the job to all aspects of the job • Negative halo effect —rater generalizes bad behavior on one aspect of the job to all aspects of the job • Similar-to-me effect i. Tendency on the part of raters to favorably judge employees whom they perceive as similar to themselves ii. Can lead to charges of illegal discriminatory bias wherein a supervisor rates of his or her race, gender, nationality, or religion more favorably than of another class

Contrast errors a. Takes place when rater compares the employee to other employees rather than to specific performance standards b. This is an error because the employee is required to perform only at minimally acceptable standards

Errors of central tendency a. Occurs when a supervisor rates all employees as average or close to average b. Most often are committed by supervisors or managers who want to “play it safe” c. It usually is a good idea to require justification at every level of the scale and not just the extremes

Errors of leniency or strictness Reflects the tendency to rate every employee at the high end or low end of the scale, respectively, regardless of actual performance b. Causes employee to believe he or she is going to receive larger or smaller pay raises, respectively, than deserved c. These errors mitigates the beliefs that effort varies positively with performance, and that performance influences the amount of pay raises d. Positive leniency error—A supervisor tends to appraise an employee’s performance more highly than what it compares against objective criteria e. Negative leniency error—A supervisor rates an employee’s performance less than what it compares against objective criteria

Strengthening The Pay-ForPerformance Link • Activities 1. Link performance appraisals to business goals 2. Communication 3. Establish effective appraisals 4. Empower employees 5. Differentiate among performers • Link Performance Appraisals to Business Goals a. Employee performance should be linked to competitive strategies b. Should be established in relation to the evaluative criteria for competitive strategies

Strengthening The Pay-ForPerformance Link • Analyze jobs a. Job analysis is important for establishing internally consistent compensation systems b. Supervisors should match the employees’ performance to the job description i. Descriptions are a product of job analyses ii. Descriptions note the duties, requirements, and relative importance of a job within the company c. May help to reduce arbitrary decisions about merit increases C. Communicate 1. Employees must clearly understand the link between performance and merit increases 2. Employees need to trust the system and the evaluators

Strengthening The Pay-ForPerformance Link • Establish Effective Appraisals 1. Should be tied to employee’s future performance goals and career plans 2. Deficiencies in performance should include methods to remedy 3. Performance standards should be used for establishing performance targets • Empower Employees 1. Encourage employee self-appraisals 2. Supervisors as coaches a. By ensuring that employees have access to the resources to perform their job b. Allowing employees to interpret and respond to work problems as they occur c. Should lead to more self-corrective actions

Strengthening The Pay-ForPerformance Link • Differentiate Among Performers 1. Merit increases should consist of meaningful increments 2. Merit increases should clearly reflect differences in actual job performance 3. Rewards can be other than base pay increases, such as: a. Additional time off b. Higher company discounts

Possible Limitations of Merit Pay Programs • Failure to Differentiate among Performers 1. Poor performers may view merit pay increases as entitlements 2. Superior performers may lose motivation to excel Poor Performance Measures 1. May evaluate invalid behaviors 2. May not be comprehensive enough 3. May be too subjective • Supervisors' Biased Ratings of Employee Job Performance 1. Bias errors 2. Contrast errors 3. Errors of central tendency 4. Errors of leniency 5. Errors of strictness 6. Personal biases for or against employees 7. These errors can undermine the credibility of the performance evaluation process

Possible Limitations of Merit Pay Programs •

1. 2. 3. 4. • 1. 2. • 1.

2. 3.

Lack of Open Communication between Management and Employees Concerning employees' performance Concerning supervisors' performance Concerning factors beyond an employee’s control that effect job performance Mistrust can lead to accusations of bias Undesirable Social Structures Pay grades can reflect status differentials Lower-paid employees may resent never being able to “catch-up” Factors Other Than Merit Supervisors may subconsciously use age or seniority instead of merit Supervisors may let personal feeling determine pay increases Company politics that puts focus on supervisors' agendas or goals instead of work goals

Possible Limitations of Merit Pay Programs • Undesirable Competition 1. Between individual employees for limited funds 2. Between individuals in team settings • Little Motivational Value 1. When employers and employees disagree on what is a “large enough” increase 2. When the yearly increase seems negligible on each paycheck

Linking Merit Pay with Competitive Strategy • Strategies to Match Compensation Practices with Company’s Competitive Strategy

• Lowest Cost Competitive Strategy

• Requires companies to reduce output costs per employee • Merit pay systems appropriate only when a. Pay increases are commensurate with employee productivity, and b. Employees maintain productivity levels over time

• Differentiation Competitive Strategy

1. Requires creative, open-minded, risk-taking employees 2. Companies must take a long-term focus to attain their objectives 3. Merit pay can promote creativity and risk-taking by linking pay with innovative job accomplishments that are established on a regular basis (merit bonus)