Employee Reward

Reward Management
After engaging with ideas discussed in this course you should:

be familiar with the alternative approaches to employee reward recognise the role of context in relation to employee reward be able to reflect systematically on the consequences of choices of approach in context
2

TEACHING AND LEARNING UNIT 1 Conceptual and Theoretical Frameworks

Professor Brian Main

Unit 1.(i)

Learning Points

1. Introduction to course Employee Reward 2. The concept of the effort bargain 3. Systems thinking interacting factors 4. Employer - employee orientations 5. Corporate, national and international contexts for thinking and acting on employee reward
5
http://www.guardian.co.uk/news/datablog/2011/dec/05/oecd-ineqaulity-report-uk-us

What is employee reward?

A reward may be anything tangible or intangible that an organisation provides to its employees either intentionally or unintentionally in exchange for the employees potential or actual work contribution, and to which individuals attach a positive value reward remuneration compensation
7

The effort-and-reward bargain

In its socio-economic relational context Every employment contract consists of two elements:
(1)

(2)

an agreement on the [reward] rate (either per unit of time or per unit of output); and an agreement on the work to be done.
Hilde Behrend (1957) University of Edinburgh (1954 1982) 8

Reward systems

Reward design

Classical labour economics models may be viewed as closed wage-setting systems. Occupational psychology may equally focus on stimuli internal to the individual organism. General systems theory (although not without critics) enables the analysis of effort-reward relationship patterns as open systems that interact dynamically and reciprocally with the environment, to understand the way different reward systems operate in practice.
9

The New Pay its not just what you pay its how you pay
Edward E. Lawler III

if you want team work do not use individual bonus payments

10

Nature of reward
Extrinsic tangible or transactional element for the work money, health care, company car, pension etc Intrinsic something derived from the work development oriented: job satisfaction, learning (self-actualisation) environment oriented: pleasant and safe working conditions
11

Unit labour costs

Cost of labour utilised per unit of output Total labour costs

_______________ Total output

Clearly wish this to be as low as possible

12

Reward versus Labour Cost

Low wages do not guarantee low unit labour costs low wages attract low quality workers low output per worker raises labour costs

Reward Systems
wages are not set in isolation what other groups getting paid what were paid last period what is happening in the economy (inflation, unemployment) AND you actions may affect these other things

High wages need not imply high unit labour costs high wages attract productive workers high wages encourage high commitment unit labour costs lowers at high productivity
13

This last point distinguishes OPEN SYSTEMS from CLOSED SYSTEMS

14

Examples of reward issues

Bankers bonuses Executive pay Minimum wage Public sector wage restraint etc

Labour as a factor of production

capital, land, labour with labour person accompanies factor into production there is a relationship employer

employee

economics + social psychology

15

16

Exercise in effort-reward bargaining

consider the job of a sales assistant in a large Department Store (e.g., Harvey Nicholson) list what the employer wants list what the employee wants identify points of tension/disagreement suggest ways to use reward to resolve these
17

Employer orientations towards the workforce (i) Employees our greatest asset need to be used effectively Interpretation Employees valuable objects but devoid of feelings Issues How do we get the best and keep them in good shape? Instrumental. Reward agenda Instrumental relationship; Pay by results; Exploitative?

18

Employer orientations towards the workforce (ii) Employees are a liability need to be controlled Interpretation Employees as liabilities troublesome responsibilities; need to be policed Reward agenda Arms length How do we minimise problems; relationship; Keep under close minimise cost. surveillance? Wary/antagonistic?
19

Employer orientations towards the workforce (iii) Employees are customers need to understand and serve them Interpretation Employees are independent beings with choices based on logic and emotion loyalty contingent. Issues What do we want as an employee? What can we offer? Employeecentred relationship. Reward agenda Understand employees preferences. Honesty and transparency. Service orientation.

Issues

20

Employer orientations towards the workforce (iv) Employees are corporate allies develop a mutual success agenda Interpretation Employees are independent beings with choices based on logic and emotion commitment contingent. Issues What do we want as an employee? What can we offer? Partner centred relationship. Reward agenda Understand employees preferences. Honesty and transparency. Alliance orientation.

Alternatives; Consequencies; Contexts

3 themes present in all discussions (i) Alternatives: e.g.: reward on time committed versus reward on performance
21 22

Alternatives; Consequencies; Contexts

Alternatives; Consequencies; Contexts

Context-free Context-bound

(ii)

Consequencies:

(iii)

Contexts:

e.g. of choice of payment by hour: poor quality output need to police hours worked etc.
23

Managers should try to define given the current limitations of the environment, and the chances of altering them to make elbow room what the best course of action might be.
24

Employee reward management contexts

Context factors:

Employee reward management contexts

Context factors (continued):

industry sector age and scale of enterprise state of economic conditions legislation (eg national minimum wage, disclosure requirements on executive remuneration) extent of globalisation presence or absence of trade unions skills shortages/tightness of labour market(s)/talent war pressures technological profile geographical setting
25

local/transnationally mobile workforce corporate governance priorities rate of product/service change duration of value-creation cycles annual employee voluntary turnover workforce demographics ownership/finance capital investment profile carbon footprint
26

Employee reward management contexts

Context factors (continued):

Summary

management style and values organisational culture mergers and acquisitions planned/pending joint ventures/partnerships

Reward defined extrinsic and intrinsic An effort bargain relationship-based Systems thinking interacting factors Employer-employee orientations Corporate, national and international contexts for thinking and acting on employee reward

http://www.cipd.co.uk/subjects/pay/general/payrewrdovw.htm

for a CIPD factsheet.

27 28

Theorising employee reward

Unit 1.(ii)

Why theory?
the rules: theories are behind all employee reward ideas. there are lots of competing theories knowing the rules helps you to understand whats said. knowing the sources and assumptions of ideas about what this or that reward policy/practice is predicted to do is empowering: you evaluate it through understanding, and you decide if it fits the situation youre in (and why).
29 30

Closed system theory

a)
Classical Labour Market - Economic man: market-based exchange relation assumption that an employee will seek to minimise sacrificed leisure time to work and to maximise the rate of pay. Labour supply and demand regulate the price (wage rates).
Wage

Conventional view of labour demand

A B C

Marginal Value of Labour ()

Wage rate

e
MVPL

D
Units (hours) of labour
31

Labour units

32

Conventional view of labour supply

Conventional view of labour market equilibrium

Supply of Labour Wage Marginal Value of Time () E F

Wage A B W* G F

Supply of Labour

C E D
33

Labour Demand MVPL

D Labour units

L*

Labour units

34

Conventional view of labour market equilibrium

Conventional view compensating wage differentials

Wage A B W* G F

Supply of Labour

Adam Smith (Wealth of Nations)

The whole of the advantages and disadvantages of different employment of labour and stock must, in the same neighborhood, be either perfectly equal or continually tending to equality. If in the same neighborhood there was any employment either evidently more or less advantageous than the rest, so many people would crowd into it in the one case and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their rational course, where there was perfect liberty and where 36 everyman was free both to choose what occupation he thought proper, and to change it as often as he thought proper.

C E D L* Labour Demand MVPL

Labour units

35

Conventional view compensating wage differentials

Adam Smiths

Compensating Wage Differentials

Adam Smith (Wealth of Nations)

1. Non-pecuniary aspects of working conditions
The five following are the principal circumstances which, so far as I have been able to observe, make up for a small pecuniary gain in some employments, and counterbalance a great one in others: first, the agreeableness or disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and fifthly, the probability or improbability of success in them. Hay points: skill, responsibility, effort etc.
37

2. Human capital: Expense of learning the business 3. Constancy of employment 4. Responsibility or trust reposed 5. Probability of success

38

Example of conventional view compensating wage differentials U3 U2

W2 W1 A C

Example of conventional view compensating wage differentials U3 U2

W2 W1 B A C

Wage

Wage

U1

U1

W P
B

Supply

Supply

P1 P1 P2 Injury Probability
39

P2

Injury Probability
40

Accept increase in probability of injury (P) in return for increase in wage rate (W)

Example of conventional view compensating wage differentials

Example of conventional view compensating wage differentials U3 U2 U1

H

Wage H W4

Wage

Production Technology

Work for W5 Accept risk P5

W3

Demand

W5

P3

P4

Injury Probability
41

P5

Injury Probability
42

Closed system theory continued

b)
Institutional Theory: factors in environmental and institutional context scale of organisation industry sector trade union presence imperfect information bounded rationality transaction costs imperfect mobility (mill towns)
43

Closed system theory continued

b)
Institutional Theory: decisions contingent on context may lead to a shared history common understandings emerge lead to a shared legitimacy of custom and practice

44

c)

Internal Labour Markets

Internal Labour Markets

Promotion as incentive/ reward

ports of entry
Entry Level 2

Not for fit

Internal Promotion Entry Level 2

ports of entry
Entry Level 1
45

Entry Level 1 Promotion as an incentive device - tournaments

46

Administered wages; rent sharing

Career Concerns
Unexpected termination of employment relationship External succession as incentive

Career Concerns

Separation as a discipline device !

47

Succession as an incentive device !

48

d)

Tournaments

Lazear, Edward and Rosen, Sherwin (1981) Rank-Order Tournaments as Optimum Labor Contracts, Journal of Political Economy, Vol. 89, No 5, October, pp 841-864.

Career Concerns - promotion

Promotions as a Tournament
Rosen

Lazear

Top prize CEO job

versus Promotions as a matching process

Relative performance measures

The Peter Principle Employees in an organization rise to the level of their own incompetence.

49

ALSO, when output depends on team effort this can lead to free riding Or sabotage - industrial politics influence costs.

50

Career Concerns - promotion

e)

Wage-gap theory

Trade union mark-up

Promotions as a Tournament ?
If it is a tournament (or any payment based on relative performance), there is more than one way to win a footrace Bad-mouth oppositions Snuggle up to the boss etc

Monopoly power in the supply of labour allows trade union to secure a mark-up over the going or market rate

All non-productive activity -Influence activities -Industrial politics

51

- especially where employer enjoys some monopoly power in the product market rent sharing
52

f)

Human Capital

College decision

Human Capital - College

B

Earnings with degree Earnings Or Costs

Earnings Or Costs

Earnings with degree

Earnings with no degree

Earnings with no degree

C
18 21

Age
53

18

21

Age

Student funds own education

54

Human Capital on-the-job

Human Capital on-the-job

With Training Earnings

Earnings

With Training

No Training

No Training

21 21 Age 65
55

Age

65

56

Simplify diagram

Human Capital who pays?

B
Productivity Or Earnings 185 160 140 125 100

Human Capital who pays?

Productivity or Earnings

Productivity with training

Productivity with extra training

Productivity with no training

Productivity with no extra training

C
21 30

Wage premium = P Age

57

21

30

Wage profile of trainee: 125 then 160

Age
58

Hold up costs

100 = productivity during training; 185 = after training 140 = productivity without training;

The Arithmetic of training

The Arithmetic of training

Expected net present values: C the cost of training B the benefits that will accrue to the employer S the salary that must be paid because of the training

Polar cases:

B >C
(i) S = 0 train, employer pays (ii) S = B employee should be willing to pay for training if can find finance

Assume employer pays for training:

B S > C train

59

60

10

The Arithmetic of training

Between these two polar cases:

Human Capital who pays?

Specific Human Capital

Productivity with employer is higher once trained Productivity no higher with other employer Employer and employee share costs

B > C and 0 < S < B

Training should go ahead

S Employer will pay up to (B-S)

Employee will pay up to Willingness to pay:

General Human Capital

S + (B - S) = B > C
Surplus to be shared
61

Productivity higher everywhere Employee pays

Barron and Kreps Chapter 15

62

Training

Training
3. The impact of the training on employee effort and loyalty, because the training improves the employees bargaining position vis-vis the firm. 4. Spillovers to other employees, both direct (the newly acquired skills are shared with coworkers) and indirect (by signalling to others and by reinforcing the organisations culture). 5. The impact the training programme has on recruitment.

The gross value added from the training is affected by: 1. Factors that impact on the employees tenure with the firm, including demographics, local job market conditions, and the firms HR practices. 2. The employees pre-existing skills and how the training in question might complement those skills.
63

64

Firms share of value added

Costs of training
1. Outstanding training programmes can be leveraged by turning them into general training institutes, which both amortises the cost of the programme and gives the organisation the ability to skim the cream of trainees. 2. Government support can sometimes be enlisted to help defray the costs of training. 3. On-the-job training can sometimes be relatively cheap, and apprentices can sometimes be employed for less than the value they provide the organisation.
65 66

The share of this value added that is retained by the firm depends on the general bargaining strengths of employee and employer, including: a) The extent to which the training develops firm-specific versus more general-purpose human capital b) Whether a substantial lemons problem exists for other employers who might seek to lure the employee away c) The degree of employee inertia, particularly loyalty engendered by the training

11

Designing training programmes

1. Cost-benefit calculations concerning human capital investments may be distorted because important benefits are intangible or long-term in nature. 2. Additional benefits of training arise through symbolic effects and impacts on third parties. 3. Systematic experimentation with the design of training programmes, criteria for selecting whom to train, and post-training assignments can help identify and maximise the value-added features of training activities.
67

g)

Principal-Agent Theory

Principal-Agent Relationship:
Principal (owner) wants hard working employee Employee wants a pleasant life Supervision - expensive Pay for Performance Incentive alignment mechanism design

68

Motivation
Standard economic model utility maximising rational amount of effort? Income good Effort bad Asymmetric information complicates matters: hidden action moral hazard post-contractual opportunism hidden information adverse selection pre-contractual opportunism
69

Principal-agent solution
Two-part approach 1: figure out what agent will do by way of effort when confronted with various incentive (payment by results) contracts 2: use this information to select the scheme that (given the predicted reaction of the agent) produces the greatest profit
Action may not always be effort minimising. E.g. CEO takes pleasure in increased status from running larger organisation and may be led into acquisitions (M&A activity) that are not in the interest of the company.

70

(i) e.g. executive pay

Base Pay versus Performance Pay

Pre-contractual:
Firm A

Base Pay versus Performance Pay

Self selection of high ability types Self selection of entrepreneurial types

Pay

Firm B

Tolerance for risk Self-belief

Post-contractual:

Incentive compensation

Performance
71

Rewards effort
72

12

(ii) e.g. Deferred payment

Base Pay versus Performance Pay

Motivation and Remuneration

Hidden information adverse selection Stay for a long time ? - Low pay but great pension.
Firm B

Firm A Pay

Hidden action moral hazard Work hard in the interests of firm? - zero base pay but high bonus
73 74

Deferred compensation

Years of service

Principal-agent solution
Two-part approach 1: Figure out what agent will do by way of effort when confronted with various incentive (payment by results) contracts 2: Use this information to select the scheme that (given the predicted reaction of the agent) produces the greatest profit subject to the outcome remaining attractive to the agent

Some principles of incentive design

Higher commission rates provide stronger incentives than lower commission rates A high commission rate above a certain threshold is generally better than a low rate on all sales, but the threshold setting process must have integrity: Dont change targets easily
Never use individual past performance as the new target Avoid caps since high productivity workers are penalized

Action may not always be effort minimising. E.g. CEO takes pleasure in increased status from running larger organisation and may be led into acquisitions (M&A activity) that are not in the interest of the company.

75

We will see that caps are very common in the 76 design of directors remuneration

Gordon Bethune Continental Airlines

(now part of United)

h)

Signalling and Screening

Analogy of the fish in the water

Signalling: Want high ability people Education signal is cheaper to the more able The more able signal their presence by offering educational credentials Screening:
Employer may use a difficult to alter characteristics to indicate a difficult-to-measure labour market characteristics Can lead to discrimination e.g., gender and career intentions

77

78

13

Recruitment

Closed system theory

i)
Psychological drives regulate the motivation to work (for reward) motivational drive to obtain extrinsic reward will diminish as basic needs are satisfied individuals will be motivated to satisfy higherorder (intrinsic) needs self-actualise. Closed system The managerial role is limited: just respond to the conditions.
80

Organisations can encourage the right applicants through: Offering premium wages and conditions, thereby attracting a larger, more able applicant pool Self-selection, which is a powerful tool for finding applicants who fit Referrals from current employees, which often have beneficial effects (including on the referrer) but can also reproduce the existing workforce Judicious use of personnel search organisations
79

j)

Efficiency Wages
Paying higher wages is CHEAPER: 1. Cheat-threat effect 2. Sample selection effect 3. Turnover effect 4. Gift-exchange/ Morale effect 5. Union deterrence effect
81

k)

Alternative view - Bonding

Deferred compensation
D Wage B A C E Productivity

Waget

Age

82

Alternative view - Bonding

Alternative view - Bonding

OBEF = OACDEF in present value terms Allows reduced supervision costs more efficient D
Wage

Deferred compensation
D Wage B A C E Productivity A

Waget

Waget
E Productivity

Age

83

Age

84

14

l) Possible modes of employer-employee relationship:

All beset by transactional details:

Employment Contracts: 1. Spot contract for future service 2. Contingent claims contract 3. Wait for future then spot contract 4. Contract now for authority relationship

1. First-mover advantage 2. Problems of opportunism 3. Bounded rationality 4. Information impactedness

Problem is to elicit consummate performance (not just perfunctory performance)

85 86

Asset specificity

Problem is to elicit consummate performance (not just perfunctory performance)

Transaction cost economics interpretation of internal labour markets suggests solution is: Governance structure

In many employment situations, employees and employer are increasingly bound to one another as they develop relation-specific assets, which dulls the discipline of market forces. This can subject either side to the threat of exploitation or a hold-up, leading to inefficient contractual guarantees, refuse to invest in the relation, or simply refuse to contribute to the common good, fearing that any such contributions will go unreciprocated
88

87

Avoiding hold-up costs

Example: Your company has just paid for you to go on the Edinburgh Business School MSc in HRM. It is now time to return to your company and you are getting very attractive offers from alternative employers. What to do?

Asking for a big raise hold up cost

89

But the threat of hold-up say, of the employee by the employer can be defeated by at least three means other than by law or contractual provision: Goodwill on the part of the employer, or an ethical aversion to exploiting employees A balance of power, arising from the credible threat by the employee to retaliate (to the extent possible) if s/he is exploited The desire of the employer to maintain a reputation generally among employees (and prospective employees) for not being exploitative
90

15

reputation and trust

qualifications

Governance in employment is efficient if decision-making authority vests in a party that: (a) has access to and ability to use information to make efficient decisions; and (b) can be trusted by the other side because, say, she has an adequate reputation stake.
91

Several qualifications to the balance-of-power and reputation stories must be given. 1. Efficiency is a product of well-designed governance and cooperative expectations. Neither alone is sufficient 2. Expectations are formed only through time, based on experience, which can make it difficult to change HR practices and policies 3. Trust is destroyed when a party with decisionmaking authority can take enormous immediate advantage of the other side
92

qualifications
4. Reputation faces a free-rider problem that is not always easily solved. Employees are most likely to solve the free-rider problem and sanction an exploitative employer when they are interdependent and/or proximate, socially homogenous, subject to peer pressure, or organisationally bonded (eg through common language, titles, or socialisation experiences) 5. In both the balance-of-power and reputation stories, the contract between parties must be clear, giving a rationale for the sort of consistency discussed in Chapter 3
93

non-market influences

In the balance-of-power and reputation stories, the exact terms of trade are not fixed by economic factors alone, but depend on bargaining ability, expectations, social custom, and the like. This economic framework is silent in two important ways (dealt with in Chapter 5): It highlights the crucial importance of the parties expectations but offers little insight into where those expectations come from It is silent on the formation of things like employer and employee goodwill
94

m) Psychological drives (continued) Herzbergs two-factor theory (motivation-hygiene theory) certain motivator factors in the workplace cause job satisfaction, other separate set of hygiene factors (or absence of) cause dissatisfaction Extrinsic versus intrinsic factors Pay may be an extrinsic hygiene factor
95

Psychological drives
Maslows hierarchy of needs

(continued)

achievement, competency, status, personal worth, and self-realization supervision, technical problems, salary, interpersonal relations on the job, and working conditions

Selfactualization Esteem
Friendship Family

Belonging Safety needs

Financial security, Health, Safety

96

water, food

Physiological needs

16

Goal setting/ Expectancy Theory

abilities
Value of reward

Goal setting/ Expectancy Theory

abilities
Value of reward extrinsic reward effort Performance intrinsic reward

effort

Performance

Satisfaction

Reward Probability given effort

role perceptions
97

Reward Probability given effort

role perceptions
98

Expectancy abilities
Value of reward extrinsic reward effort Performance intrinsic reward Reward Probability given effort
(will performance lead to result)

Satisfaction

Instrumentality
(will result turn into reward)

role perceptions
99

Valence
(assessment of likely satisfaction 100 of reward)

Psychological contract:
n) Causes:
Organisational Culture; Experience; Expectations; Alternatives

Employment as a Social Relation

Employment relations are shaped by economics and by social and psychological forces. Process and symbolism are at least as important to effective HRM as are the content and economic values of HR practices.

Content: Fairness; Trust; Delivery of the deal

Consequencies:

Citizenship; Commitment; Motivation; Satisfaction

A fair days work for a fair days pay.

101 102

We pretend to work and they pretend to pay us.

17

Key cognitive and social-psychological processes

2. Attributions about attitudes, motivations,

and behaviours, based on inferences from observing our own conduct: 2.1 Intrinsic motivation to do a task can be muted by calling conspicuous attention to extrinsic rationales for doing the task. When extrinsic rationales are absent, individuals tend to attribute effort they expend to their liking of the task or some other higher purpose, thereby enhancing commitment.
104

A number of cognitive and social-psychological

processes are key to employment relationships: 1. Anchoring on available and salient cognitive anchors for example, the level of performance expected by superiors often anchors the level of performance that is provided

103

2.2 Commitment so derived escalates the longer the individual performs the task without attributing motivation to external influences. 2.3 Intrinsic motivation is probably more prevalent than you think and represents a powerful motivational device in situations where extrinsic incentives are hard to get right.
Making monetary rewards (e.g., bonuses) too salient can be counterproductive

3. Individuals evaluate their position relative to others, in a process of social comparison: 3.1 Social comparisons sometimes occur upward and downward, but in work settings the most common comparisons are horizontal, vis--vis others who are similar demographically, in terms of status, etc. 3.2 Formal organisational categories shape the social comparisons individuals make. So organisations use categorisation processes (job levels etc.) strategically to affect outcomes and behaviour.
105 106

4. Individuals attend not only to the absolute rewards they receive, but how they fair relative to others (distributive justice) and the processes by which outcomes are determined (procedural justice): 4.1 Distributive justice can be assessed based on ideas of equality, meeting needs, or (more prevalent in work settings) the equity principle that rewards should go to those who contribute the most.

4.2 Perceptions of procedural justice tend to rise when procedures: are based on valid criteria; are applied consistently and explained clearly by competent individuals; reinforce organisational values and culture; do not denigrate the individual; and involve participation and a right of appeal.

107

108

18

5. Reciprocity and gift exchange the desire to reciprocate gifts in kind can be a powerful force for eliciting consummate effort from employees. The nature of the gift and the situations of the gift giver and receiver all affect the extent to which a gift is perceived as such.

6. Status inconsistency occupying discrepant positions on multiple organisational and/or social hierarchies can have negative effect. Unnecessary status conflicts should be avoided; where they are necessary or unavoidable, artificial means for reinforcing the desired status hierarchy can help (e.g., low badge numbers denoting long-tenure at Apple).

Pay, authority level, and technical expertise should balance where possible
109 110

7. An important source of organisational inertia is a need for legitimacy in organisational practices (building trust through consistency). Constant change de-legitimises practices.

This organisational inertia can be regarded as a legitimation cost.

111

112

Jeffrey Pfeffer: Six Dangerous Myths About Pay (HBR May/June 1998)
1. labour rates are the same as labour costs. 2. cutting labour rates will lower labour costs. 3. labour costs represent a large portion of a company's total costs. 4. keeping labour costs low creates a potent and sustainable competitive edge. 5. individual incentive pay improves performance. 6. people work primarily for the money.
113

Closed system theory

Closed system The managerial role is limited: just respond to the conditions.

114

19

Criticisms of closed system theory

Fails to explain observed variations

Open systems perspective

to similar groups across system all other things equal is ambiguous in dayto-day practice - becomes messy. Most people dont behave this way because of bounded knowledge need to earn an income for living costs. People read signals conveyed by extrinsic reward regarding what an organisation regards as important and may use wage to reinforce higher-order senses such as self-esteem.
115

Supply

Competition in labour market

Pay rate

Demand
116

Open systems perspective

Education Training decisions

Open systems perspective

Education Training decisions

Behavioural expectations

Behavioural expectations
Household work-life constraints

Supply

Supply
Household work-life constraints

Competition in labour market

Pay rate

Competition in labour market

Institutional:

Pay rate

Demand
117

Demand

legal + social norms trade unions etc..

118

Open systems perspective

Education Training decisions

Costs/ Benefits of Teams

Behavioural expectations

Supply

Benefits
Household work-life constraints

Competition in labour market

Institutional:

Pay rate

Complementary skills and experiences Greater flexibility Social benefits -- fun and commitment Less resistant to change

Costs
Management input Efficiency wages Principal-agent incentives etc.

Demand

legal + social norms trade unions etc..

Coordination costs Personal discomfort and conflict Diffusion of responsibility, free riders Increased risk seeking
119 120

20

About Teams

About Teams

Principal-Agent Relationship:
Principal (owner) wants hard working employee Employee wants a pleasant life Supervision Pay for Performance Incentive alignment

Free-Rider Problem in teams:

Team of 10 Share productive effort My effort in the next hour costs me 50 My effort in the next hour creates 100 value My slacking has opportunity costs = 10 Incentive to slack as become free rider

121

122

About Teams

About Teams

Note on last example:

If I slack and no one else does I get 90 for an hour of slacking If everyone else slacks and I work I get 10 for an hour of work and that hour cost me 50 So I net -40 on the experience If everyone else slacks and I slack I get zero
123

Prisoners Dilemma:

I work I slack

Others Work (50,50) (90,40)

Others Slack (-40,10) ( 0, 0)

124

(My net pay-off, net pay-off of representative other team member)

About Teams
Necessary expenditure on employee reward So why work in teams?!
The whole is greater than the sum of the parts (lifting) Specialization (Adam Smith) Knowledge Transfer (hold-up costs and opportunism) Appropriate measurements Widespread information sharing Individual and group rewards

125

126

21

Issue
Wage Attraction of skilled labour

Theory
Market clearing Human capital Exchange theory, Efficiency wages Internal labour market; Rent sharing

Source
Neo-classical economics Institutional economics Institutional economics,

Comment
Closed system Premium to skills / experience

Management influence on work attitudes and behaviour that arises form employee reward

Control and retention

Bargaining to limit instrumental behaviour

Stability

Institutional economics, Industrial relations

Large private firms or public sector

Incentives

Tournaments

Managerial economics

Premium on talent
127 128

Issue
Employee discretion Managerial control Employee satisfaction

Theory
Role Agency

Source
Sociology Labour Economics Managerial psychology

Comment
Vague Alignment of interests Job enrichment versus reward

Fair returns to investment in human capital with employer

Drive theories

Learning/ training

Reinforcement theory

Managerial psychology

Danger of damaging implicit contract

Incentive for future oriented effort

Expectancy theory

Managerial psychology

Signals as credible information

Informational signals

Cognitive evaluation theory

Managerial psychology

Continuous effort-reward bargaining is ongoing 129

130

Exercise:
Issue
Perceptions of organisational justice

Theory
Distributive/ Procedural/ Interpersonal Justice

Source
Political science, Sociology

Comment
Attention to process as much as to substance of employee reward

Reflect on the apparent indications that people in the public and private sectors are adopting alternative employee reward determination theories.
Report in People Management (June 2008) accessed by following the Internet hyperlink: http://www.peoplemanagement.co.uk/pm/articles/2008/06/longterm-pay-deals-a-safe-choice-in-uncertain-times.htm prompts consideration of the way employers and employees may be theorising the implications of pay-rate-setting over the short versus medium term, when concerns exist related to economic uncertainty.

Trust in Psychological employer to honour implicit contract theory expectations

Managerial psychology

Need to avoid damaging employees implicit expectations

131

132

22

Summary

A rationale for practical theory on employee reward Closed system theory and its critics Interactive open perspectives on reward setting Theories on level of reward to be set Theories on managerial influence through reward Theories on principles of organisational justice and the balance between explicit and implicit contracts
133

23