1. PAY FOR PERFORMANCE DEBATE
Abdul Binsahman, Christine Bills, Lindsey Janosko , Evelyne Ringia, Suzanne Mell

2. Pay for Performance (PFP) or
Incentive Pay
• Incentive Structure to encourage & direct employees’
behaviors to meet production goals
• Compensation based on completion of goals
• Goals need to be realistic, measureable and clear
• Rewards and incentives must be desired by employees
• PFP should be seen as an investment, not an expense

3. Pay for Performance
• Financial Incentives:
• Piecework rates
• Performance bonuses
• Sales commission
• Stock Ownership
• Profit Sharing

4. • Non-Financial Incentives:
• Time off
• Praise & recognition
• Promotion
• More vacation days
• Free Vacations
Pay for Performance

5. PFP Increases Productivity &
Performance
• “Fortune’s Annual 100 Best Companies to Work for List”
• Quicken Loans treats workers to a free vacation every two years
• Hilcorp Energy Company rewarded staff with $100,000 each for
doubling production rates and reserves over a 5 year span
• 2011, Chesapeake Energy paid out more than $8 million to 6
thousand employees for following safe work practices
• Mayo Clinic, onsite massages to cope with work anxieties
• Aflac- week long employee appreciation week annually with prizes

6. Why Practice PFP?
Equity Theory by Adams (1963):
• People have beliefs about fairness & rewards for their job
contributions
• Skills, expertise & work ethic (inputs) should be
rewarded with monetary & non-monetary
compensation (outputs)
• PFP creates a sense of fairness and motivation for
employees performing well

7. Why Practice PFP?
Equity Theory by Adams (1963):
• When employees are not compensated for work, they will
seek justice:
• Decrease inputs:
• slacking off
• Quitting
• slandering company
• sabotaging co-worker’s

8. Vroom’s Expectancy Theory
• Employee’s performance is based on individual factors
• Individuals may have different goals but they can be
motivated if:
• There is a positive correlation between efforts and
performance
• Favorable performance will result in desirable reward
• The reward will satisfy a personal need
• The desire to satisfy is strong enough to make effort
worthwhile

9. Vroom’s Expectancy Theory
Source: PSU.edu

10. Pros: Increases Productivity &
Performance
Ex) Study by Kelly Global Workforce Index of 13,000 workers
in the U.S. found:
• 25% of U.S. workers compensation is tied to reaching
performance targets.
• Men are more frequently involved in PFP plans than women
• Generation X (ages 30 to 47) receive PFP pay more than Baby
Boomers & Generation Y.
• Over 51% say they would be more productive and improve
performance level in workplace if earnings were tied to
performance outcomes.

11. Pros: Increases Productivity &
Performance
DreamMaker Bath & Kitchen implemented incentive
programs for sales and labor teams:
• Increased Customer Satisfaction: Store was meeting
deadlines & improved employee attitudes
• Better Cost Control: Deadlines met = decreased overtime
• Improved estimating: fewer change orders
• Checks and Balances System: Employees watched others
progress to ensure progress for compensation

12. Pros: Employee Retention
• Feel valued by the company and more likely to stay
• Incentives help attract more desirable and motivated
employees
• High level of commitment to company
• Increased job satisfaction
• Increase in innovative ideas & solutions

13. Pay for Performance & Employee
Engagement:
• Employees are engaged when they are fully involved and
enthusiastic about their jobs and their organizations.
• Engaged Employees are 20-28% more productive
• Share prices of organizations with highly engaged
employees rose by an average of 16 percent
• Disengagement costs between 243 to 270 billion dollars
due to low productivity
(Esty & Gewirtz, 2008)

14. Motivating Top Performers
• Satisfying the needs of top performers and nurturing their
professional growth is critical to organizational success
• Top performers boost company performance:
• Directly—by working diligently at their jobs
• Indirectly, by their ability to inspire and motivate others.
• It is critical to invest the time and energy to keep them
satisfied and engaged
(Harvard Business)

15. Pay for Performance &
Engagement
• Timely feedback increases employee engagement
• Clear operational goals = Clear Expectations
• Goals are communicated
• Goals are measurable
• Employees are accountable
for reaching their goals

16. Effective Rewards Drive
Performance
• Individual and team monetary rewards:
• Tied to strategic metrics
• Tied to strategic goals
• Reinforces message about what is important
• Monetary (extrinsic) combined with excitement
(intrinsic) factors, play a major role in ensuring focus
and consistent performance.
(Sullivan, 2011)

17. • Extrinsic Motivators are related to the job
environment not the job content itself
• Provides short term motivation only
• Intrinsic Motivators appeal to people's inner
drives, needs, and desires
• Achieve better results
• Related to job content
• Draws motivation from within employees

18. Discussion Item Three – Working
Conditions
Discussion Item One – Salary, raises and
other forms of compensation
Discussion Item Two – Company policies
and benefits
Discussion Item Four – Status
Extrinsic Motivators
Extrinsic
Extrinsic
Extrinsic
Extrinsic

19. Discussion Item Three – Opportunities to
learn and grow
Discussion Item One – On-the-job-
achievement
Discussion Item Two – Positive feedback
about the quality of work
Discussion Item Four – Accountability &
responsibility for the work being done
Intrinsic Motivators
Intrinsic
Intrinsic
Intrinsic
Intrinsic

20. • Treat your team members like business partners
by sharing information about the company
• Ask for input on new ways of doing things
• Listen intently and work to implement one new
idea from the team each quarter
• Hold everyone accountable for their
performance: top and bottom performers
• Extrinsic and intrinsic rewards
Motivating Top Performers

21. Case Study: The Lego Experiment
• Participants were split into two groups
• The first group’s sets would stay together
• The second group’s sets would be taken apart after
the participant put it together
• The amount they were paid for each set declined as
they built more sets ($2.00, 1.89, 1.78 … .02)
• Participants would build many more sets in the first
group than the second group

22. Case Study: The Lego Experiment

23. Does Pay for Performance
Really Work?
• The answer is that while pay for performance can work, it's
not the solution for every organization.
• A survey by Hewitt Associates LLC found: that
• Nearly 8 in 10 companies have some
kind of variable pay system
• This is up from fewer than 5 in 10 in 1990

24. Does Pay for Performance
Really Work?
• The concept of pay for performance isn't new
• Ancient Mesopotamians were paid by the basket for picking
olives-form of performance-based pay.
• Modern era, the term is used fairly loosely and often includes:
• Commissions and bonuses
• Variable pay approach anchored to evaluation & performance.
• Re-earned each year
• Not a permanent increase in base salary

25. When it works?
1. When it is designed for whole-company
success:
• Pay for performance is often criticized for tilting a
company toward one measure and away from
another.
• Individual goals can pit workers against each other.
• A plan that focuses only on output will invariably
suffer in the area of quality.

26. When it works?
• When it is designed for whole-company
success:
• Pay for performance is often criticized for tilting a
company toward one measure and away from another.
• Individual goals can pit workers against each other.
• A plan that focuses only on output will invariably suffer
in the area of quality.

27. Case Study: Federal Reserve
Experiment
• Series of three experiments
• Participants were given tasks and based on their
performance, they would receive different amounts of
compensation
• Highest compensation brought out highest level only in
purely mechanical tasks
• In any task that required creativity or thought, lower levels
of compensation brought out better performance.

28. When it works?
• There are clear expectations:
• Must evaluate people on a regular basis
• Clear communication of expectations & performance
• Allows for employees to make adjustments
• They feel their job is under their control
• There is commitment to training and support:
• Requires a commitment to training for it to work
• Usually requires more administrative support

29. When does PFP fall short?
• When it pits employees against each other:
• Sets up competition between employees
• Impedes teamwork
• Research completed at Stamford University found:
• Pay for performance a myth
• PFP sets up competition between employees
• Emphasize the individual rather than the team
• Virtually all innovations are group efforts
• Incentive pay is toxic, the system creates greedy rival gangs
of workers, not profit

30. When does PFP fall short?
• Discourages learning new skills & cooperation with others.
• It may compromise quality
• How incentive sometimes “work”
• This figure shows how 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.

31. When does PFP fall short?
• When it pits employees against each other:
• Sets up competition between employees
• Impedes teamwork
• Research completed at Stamford University found:
• Pay for performance a myth
• PFP sets up competition between employees
• Emphasize the individual rather than the team
• Virtually all innovations are group efforts
• Incentive pay is toxic, the system creates greedy rival gangs
of workers, not profit

32. When does PFP fall short?
• When it pits employees against each other:
• Sets up competition between employees
• Impedes teamwork
• Research completed at Stamford University found:
• Pay for performance a myth
• PFP sets up competition between employees
• Emphasize the individual rather than the team
• Virtually all innovations are group efforts
• Incentive pay is toxic, the system creates greedy rival gangs
of workers, not profit

33. When does PFP fall short?
• Fails to encourage intrinsic motivation:
• The more you reward people for doing something,
the more their intrinsic motivation tends to decline.
• Case Study: 1999 Deci and colleagues of
128 studies found that in nearly all
situations in which people are doing things
in order to get rewards, extrinsic tangible
rewards undermine intrinsic motivation

34. • Under targeting:
Dozens of the largest American corporations routinely set
performance targets so low they’re effectively meaningless,
including Walt Disney and Valero Energy
Case Study: Wynn Resorts Ltd. offers a more egregious
example of the under-targeting practice. The casino company
founded by major GOP donor Steve Wynn made his 2011
and 2012 bonuses contingent on earnings that were actually
lower than the previous year’s, effectively guaranteeing
Wynn a combined $19 million in taxpayer-subsidized bonuses
over two years.
When does PFP fall short?

35. When does PFP fall short?
Fraud
• Some of the largest alleged accounting frauds in history occurred
in the last several years, leading to the well-known upheaval in
the accounting industry and sweeping legislative and regulatory
changes. One of the incentives that managers might be
responding to is the increase in the proportion of their wealth
that is tied to stock-based compensation.
• Case Study: When Exelon Corp., the country’s largest operator
of nuclear power plants, fell six cents per share short of the
annual performance level that would trigger $20 million in cash
bonuses to executives, the company simply “tacked on” $85
million in profit it hadn’t earned in order to ensure the payouts
happened. One Tennessee-based energy company paid its CEO a
million-dollar performance bonus for delivering “a higher
percentage increase” in stock price than the company’s
competitors, even though the company’s stock lost 6 percent of
its value.

36. When does PFP fall short?
Effect on Tax payer’s money
executive compensation in the form of stock is
tax- deductible for companies under a 1993
law, and much of the performance-based
compensation executives draw is paid in stock,
such gaming of performance targets ends up
hurting taxpayers.

37. When does PFP fall short?
• When it is so subjective that it opens the company
to allegations of bias:
• Case Study: Former and current employees at
Microsoft, Ford, and Conoco have filed lawsuits, alleging
that the forced-ranking systems used by those companies
to award bonuses and weed out underperformers were
biased against some groups of workers:
• White males over blacks or women
• Younger managers over older ones.

38. Can you make it work?
• Success depends on the ability of managers to make
objective assessments of their employees
• Managers must differentiate between performances
that meet, exceed or fall short of expectations
• Competency-based systems should measure an
employee's performance against a set of core
behaviors that have a proven impact on business.
• There must be follow-up evaluations.

39. Can you make it work?
• Payouts should be made quarterly rather than
annually
• Must be communicated clearly, frequently,
and simply
• Success depends on training,
reinforcement & company-wide
commitment.

40. Conclusion
• Evidence suggests that compensation committees face
a trade-off between the positive incentive effects
afforded by PFP and the negative side effects, such as:
• Accounting Fraud
• Decreased Teamwork
• Decreased Quality
• Organizations should design a mix of pay programs
and consider extrinsic and intrinsic motivators to be
successful.

41. Questions? Comments?

42. References
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