TRAINING DEFINED

• TRAINING is a learning process that involves

the acquisition of knowledge, sharpening of
skills, concepts, rules, or changing of attitudes
and behaviours to enhance the performance
of employees.
 DEVELOPMENT DEFINED
• DEVELOPMENT, on the other hand, helps the
individual handle future responsibilities, with
less emphasis on present job duties.
TRAINING & DEVELOPMENT
Training and development constitute an ongoing process
in any organization.
In simple terms, training & development refer to the
imparting of specific skills, abilities and knowledge to an
employee.

The need for training and development is determined by

the employee’s performance deficiency computed as
follows:
Training & Development need = Standard Performance –
Actual Performance
 Need and basic purposes of training
• To Increase Productivity
• To Improve Quality
• To Help a Company Fulfil Its Future Personnel
Needs
• To Improve Organizational Climate
• To Improve Health and Safety
• Obsolescence Prevention
• Personal Growth
 Designing Effective Training Activities
The Training Process
1. Needs Assessment
• Organizational Analysis
• Person Analysis
• Task Analysis

2. Ensuring Employees’ readiness for Training

• Attitudes and Motivation
• Basic Skills

3. Creating a Learning Environment

• Identification of learning objectives and training outcomes
• Meaningful material
• Practice
• Feedback
• Observation of others
• Administering and coordinating program
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Designing Effective Training Activities
(cont.)

The Training Process

4. Ensuring Transfer of Training
• Self-management strategies
• Peer and manager support

2. Selecting Training Methods

• Presentational Methods
• Hands-on Methods
•Group Methods

3. Evaluating Training Programs

• Identification of training outcomes and evaluation design.
•Cost-benefit analysis

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

 Needs Analysis

Organizational Analysis

Person Analysis

Task Analysis

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

 Training Process

Organisational Objectives
& Strategies

Assessment of Training Needs

Establishing of Training Goals

Devising Training Programme

Implementation of
Training Programme

Evaluation of Results
 Methods of Training

On the job training Off the job training

Orientation Training Vestibule
Job instruction training Lecture
Internship Films
Job rotation Conference or Discussion
Coaching Case study
Role Playing
Programmed Instruction
Laboratory training
ON THE JOB TRAINING

Orientation Training – It is given to the new hires for

adapting himself to the new environment.

Job Instructing Training – Step by step training

process w.r.t way of performing jobs, job
knowledge & skills.

Internship – To be associated with an organization

for a short period to have a technical knowhow of
the industry.
Job Rotation – Movement of trainee from one
job to another & receives job knowledge &
experience in different departments &
assignments.

Coaching – Placed under a particular

supervisor who coaches the trainee. He
provides suggestions for improvement in work
for the trainee.
OFF THE JOB TRAINING

Vestibule – Actual work conditions are simulated in a

classroom. Commonly used for training clerical &
semi-skilled jobs.

Lecture – A traditional & a direct method of

instruction where the instructor organizes materials &
gives it to a group of trainees in the form of a talk.

Films – Documentaries, clippings etc.

Conference or Discussion – A group of people who

pose ideas, examine & share facts & draw
conclusions which contributes to job performance.
Case Study – This analysis helps to examine
situations & encourage decision making capabilities
of the analyst.

Role Playing – Human interaction that involves

realistic behavior in imaginary situations.

Programmed Instruction – Subject matter to be

learned is presented in a series of planned
sequential units. The trainee answers questions / fill
in the blanks by crucial examination.

Laboratory Training – Helps in self examination to

test reliability & validate the statement / theory.
 Types of Training
1. Orientation Training

2. Job Instruction training

3. Refresher Training

4. Apprenticeship training

5. Vestibule Training
 A Systematic Approach to Training
1. 2. 3.
Assessment Implementation Evaluation
Determine Select training Compare
training methods training
needs outcomes
against
criteria

Identify Conduct training

training
objectives
 Training Needs Assessment
1. Organizational Analysis
1. Analysis of objectives
2. Resource utilization analysis
3. Environmental scanning
4. Organizational climate analysis
2. Task or Role Analysis
3. Manpower Analysis
 Training Methods
Job Instruction Training (JIT)- to teach
workers how to do their current jobs.
1. The trainee receives an overview of the
job
2. The trainer demonstrates the job to give
the employee a model to copy.
3. The employee is permitted to copy the
trainer’s way.
4. The employee does the job independently
without the supervisor.
 Job Instruction Training
Merits Demerits
1. Trainee learns fast 1. The trainer should be
through practice and good
observation 2. Trainee while learning
2. It is economical may damage equipment,
3. The trainee gains waste materials, cause
confidence quickly as he accidents frequently
works himself 3. Experienced workers
4. It is most suitable for cannot use the
unskilled and semiskilled machinery while it is
jobs where the job being used for training
operations are simple
 Coaching and Mentoring
• Coaching is one-on-one relationship
between trainees and supervisors which
offers workers continued guidance and
feedback.

• Mentoring is a particular form of coaching

used by experienced executives to groom
junior employees. Mentoring involves one-
on-one coaching for a period of several
years.
 Job Rotation
• It involves the movement of trainee from one
job to another.
• It allows workers to build rapport with a wide
range of individuals within the organization
• Disadvantage is that expertise may not be
developed
 Apprenticeship Training
• Apprentices are trainees who spend a
prescribed amount of time working with an
experienced guide, coach or trainer.
• Disadvantage is that people have different
abilities and learn at varied rates. So job skills
acquired may no longer be appropriate.
 Committee Assignments
• Trainers are asked to solve an actual organizational
problem. The trainees have to work together and
offer solution to the problem. This method of
training helps them develop team spirit and work
unitedly towards common goal.
• Disadvantage is disruption in production schedule.
 Off the Job Methods
1. Vestibule Training
2. Role Playing
3. Lecture Method
4. Conference/ Discussion Approach
5. Programmed Instruction
 Behaviorally Experienced
training

• Role Playing
• Business games
• Cases
• Incidents
• Group Discussions
• Short assignments
• Sensitivity Training
• Lab Training
 Training Vs Development
 Training : often has been referred to as teaching specific skills
and behavior.
examples-learning to fire a rifle, to shoot foul shots in basketball
and to type.
It is usually reserved for people who have to be brought up to
performing level in some specific skills
 Development: This in contrast, is considered to be more general
than training and more oriented to individual needs in addition
to organizational needs and it is most often aimed towards
management people. Usually, the intent of development is to
provide knowledge and understanding that will enable people to
carry out non-technical organizational functions more effectively,
such as problem solving, decision-making and relating to people.
 Distinction between Training and Development
Learning Dimension TRAINING DEVELOPMENT
Meant for Operatives Executives
Focus Current Job Current and future jobs
Scope Individual employee Work group or organization
Goal Fix current skill deficit Prepare for future work
demands
Initiated by Management The Individual
Content Specific job related General Knowledge
information
Time-frame Immediate Long term
Training refers to the process of imparting specific
skills. Education, on the other hand, is confined to
theoretical learning in classrooms.

Training Education
Application Theoretical Orientation
Job Experience Classroom Learning
Specific Tasks General Concepts
Narrow Perspective Broad Perspective
 The Benefits of Training
• How Training Benefits the Organisation
   Leads to improved profitability and/or more positive
attitudes towards profit orientation.
  Improves the job knowledge and skills at all levels of the
organization.
    Improves the morale of the work force.
 Helps people identify with organisational goals.
 Helps create a better corporate image.
 The Benefits of Training
 Aids in organisational development.
 Helps prepare guidelines for work.
 Aids in understanding and carrying out organisational
policies.
 Provides information for future needs in all areas of the
organisation.
Organization gets more effective decision making and
problem solving.
• Aids in developing leadership skills, motivation, loyalty,
better attitudes, and other aspects that successful workers
and managers usually display.
 The Benefits of Training

  Aids in increasing productivity and/or quality of

work.
 Helps keep costs down in many areas, e.g.,
production, personnel, administration, etc.
 Develops a sense of responsibility to the
organisation for being competent and
knowledgeable.
• Improves labour-management relations and
creates an appropriate climate for growth,
communication.
 The Benefits of Training
Reduces outside consulting costs by utilising
competent internal consulting.
  Stimulates preventive management as opposed
to putting out fires.
   Eliminates sub-optimal behaviour.
   Helps employees adjust to change.
• Aids in handling conflict, thereby helping to
prevent stress and tension.
 Benefits to the Individual

 Helps the individual in making better decisions

and effective problem solving
Through training and development, motivational
variables of recognition, achievement, growth,
responsibility and advancement are internalised
and operationalised.
• Aids in encouraging and achieving self-
development and self-confidence.
 Benefits to the Individual

 Helps a person handle stress, tension, frustration

and conflict.
 Provides information for improving leadership
knowledge, communication skills, and attitudes.
  Increases job satisfaction and recognition.
 Moves a person towards personal goals while
improving interaction skills.
  Satisfies personal needs of the trainee.
 Benefits to the Individual

 Provides trainee an avenue for growth and

a say in his/her own future.
Develops a sense of growth in learning.
 Helps a person develop speaking and
listening skills; also writing skills when
exercises are required.
Helps eliminate fear in attempting new
tasks.
 Benefits in Intra and Inter-group
Relations
• Improves communication between groups and
individuals.
 Improves interpersonal skills.
Makes organisation policies, rules and regulations
viable.
 Improves morale.
 Builds cohesiveness in groups.
   Provides a good climate for learning, growth, and
coordination.
• Makes the organisation a better place to work.
 Contributions of Training

1. Increased Productivity
2. Improved Morale
3. Reduced supervision
4. Reduced accidents
5. Increased organizational stability
 Training can...
• Increase employees’ knowledge of foreign competitors and cultures.
• Increase employees’ knowledge of foreign competitors and cultures,
• Help ensure that employees have the basic skills to work with new
technology,
• Help employees understand how to work effectively in teams to contribute to
product and service quality.
• Ensure that the company’s culture emphasizes innovation, creativity, and
learning.
• Ensure employment security by providing new ways for employees to
contribute to the company when their jobs change, their interests change, or
their skills become obsolete.
• Prepare employees to accept and work more effectively with each other,
particularly with minorities and women.

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

IMPORTANCE OF TRAINING AND
DEVELOPMENT
Training and development programmes help to
remove performance deficiencies in employees. It
is required when a
• The deficiency is caused by the lack of ability
rather than a lack of motivation to perform.
• The individuals involved have the aptitude &
motivation need to learn to do the job better.
• Supervisors & peers are supportive of the desired
behaviors.
 Evaluation of a Training Program
• Reactions
• Learning
• Job Behavior
• Organization
• Ultimate value
Decision Points in Planning Training Evaluation- John Dopyera
and Louise Pitone
1. Should an evaluation be done? Who should do the
evaluation?
2. What is the purpose of evaluation?
3. What will be measured?
4. How comprehensive will the evaluation be?
5. Who has the authority and responsibility?
6. What are the sources of data?
7. How will the data be collected and compiled?
 Methods of Evaluation
1. Questionnaires
2. Tests
3. Interviews
4. Studies
5. Human resource factors
6. Cost benefit analysis
7. Feedback
 Management Development
• The development of human resources is a part of
strategic human resource plan.
• Employees have career aspirations when they join an
organization. It makes good business sense to
provide incentives to employees to remain with the
organization especially when management makes
considerable investments in training and developing
its human resources.
 Strategic Human resource
Development
• Hall defined Strategic Human Resource
Development as - The identification of needed
skills and active management of employees
learning for the long range future in relation
to explicit corporate and business strategies.
 Three Basic Training and
Developmental Strategies
Wexley and Latham propose three basic developmental
strategies organizations use:
1. Cognitive: being concerned with altering thoughts and
ideas (knowledge, new processes)
2. Behavioral: attempts to change attitudes and values
3. Environmental: Strategies to change attitudes and values
 Training and Development Strategies

Strategies Instruments/Programs

Cognitive Articles, lectures, videos, university

courses, management seminars

Behavioral Role playing, behavior modeling,

Managerial grid, sensitivity training,
outdoors, team building, mentoring
Environmental Job rotation, organizational
development, the learning organization
concept, temporary assignments,
employee exchange programs, matrix
management, project team, internal
consulting, cross-cultural management
training
 Cognitive Strategy
• The cognitive strategy is probably the least
effective in management development. The
methods used are relatively passive. While
this approach tends to increase the
knowledge and expertise of individuals, it
does little to change a person’s behavior,
attitudes and values, important elements of a
manager’s career development.
 Behavioral Strategy
• Behavioral Strategies aim at making
individuals more competent in interacting
with their environment
• e.g with colleagues, subordinates or
customers
 Common Instruments for Behavioral
Strategy
1. Role Playing- well known and effective method
to familiarize an employee with how to apply
concepts learned in the classroom in a practical
setting.

2. Behavior Modeling- teaches a desired behavior

effectively by providing the trainee with a vivid
and detailed display of desirable behavior by a
manager of ten with strong social
reinforcement.
 Common Instruments for
Behavioral Strategy
3. The Managerial Grid Approach- is an example of
attempting to change the dominant management
style in an organization e.g. to make managers
more person or task oriented to increase their
effectiveness.

4. Sensitivity training- is considered to be very

effective method for making managers more aware
of the impact of their own behavior on others or to
prepare them for more effective interactions with
staff in foreign subsidiaries or joint ventures.
 Common Instruments for Behavioral Strategy
5. Outdoors- has become a fashionable development
method, involving team oriented tasks done in the
wilderness e.g. mountain climbing. The objective is
to develop a strong team spirit by making team
members depend on each other for survival.
6. Team Building helps team members to diagnose
group processes and to devise solutions to
problems.
7. Mentoring involves establishing a close relationship
with a boss or someone more experienced who
takes a personal interest in the employee’s career
and who guides and sponsors it.
 UNIT- 4

Performance Appraisal :
Performance Appraisal (PA) refers to all
those procedures that are used to
evaluate the personality, performance,
potential, of its group members
 Relationship between job analysis and
performance appraisal:
Job analysis performance performance
standards appraisal

Describes work
Translate job
& Personnel Into levels of Describes the
Requirement To acceptable Job relevant
Of a particular Or unacceptable strengths and
performance weakness of
job
Each individual
 Question arises?

• Why do we measure performance?

• Effective performance appraisal
systems
• How do we measure performance?
 Characteristics
• It is a step by step process
• It examine the employee strengths and
weaknesses
• Scientific and objective study
• Ongoing and continuous process
• Secure information for making correct
decisions on employees
 Needs and Objectives:

• Provide feedback about employees

• Provide database
• Diagnose the S & W of individuals
• Provide coaching, counseling, career planning to
subordinates
• Develop positive relation and reduce grievance
• Facilitates research in personnel management
 Appraisal Benefits (cont.)
• Appraisals offer
employees:
– Direction
– Feedback
– Input
– Motivation
 Appraisal Benefits
• Appraisals offer the company:
– Documentation
– Employee Development
– Feedback
– Legal protection
– Motivation system
 Why Appraisals Are Important

•Recognize accomplishments
•Guide progress
•Improve performance
Steps in Performance Appraisal

Establishing job standards

Designing an appraisal programme

Appraise performance

Performance interview

Use appraisal data

For appropriate purpose
 Process of PA
Setting
performance
Taking corrective Communicating
standards
standards standards

Discussing Measuring
results standards
Comparing
standards
 Issues in appraisal system
Formal and informal

What methods? Whose performance?

When to evaluate? Appraisal Design? Who are the raters?

What to evaluate? What problems?

How to solve?
 What to evaluate? (Philip Model)

H Problem stars
children
Potential Planned Social
separation citizen
L
L Performance H
How PA contribute to firm’s competitive
advantages

Improving
performance
Making correct
Values and behavior decision

Competitive
advantage

Minimizing dissatisfaction Ensuring legal

And turnover competence
 Problems in performance appraisal
1. Errors In rating
– Halo effects
– Stereotyping
– Central tendency
– Constant error
– Personal bias
– Spill over effect
 Problems in performance appraisal
(Cont’d)
2. Incompetence
3. Negative approach
4. Multiple objectives
5. Resistance
6. Lack of knowledge
Essentials of an effective appraisal system

• Mutual trust
• Clear objectives
• Standardizations
• Training
• Job relatedness
• Documentation
• Feedback and participation
• Individual differences
• Post appraisal review
• Review and appeal
 Appraisal Forms
• Define performance expectations
• Describe measurement tools
• Use a rating system
• Cover specific examples
• Set measurable goals
 Measure Performance
• Measurement systems need to be:
• Specific
• Fair
• Consistent
• Clear
• Useful
Measure Performance (cont.)

Systems can be:

• Numerical
• Textual
• Management by Objective (MBO)
• Behavior oriented
 Document Performance
• Make sure documentation is objective
• Document performance of all
employees
• Provide complete and accurate
information
• Document performance on a regular
basis
 Set Goals….
• Based on job requirements
• Realistic
• Measurable
• Observable
• Challenging
• Prioritized
 Employee Input

• Employees take an active role:

– Setting goals
– Designing action plans
– Identifying strengths and weaknesses
– Employees participate in the PA meeting
 Focus of Performance
Management

Progress and success

toward goal achievement

73
 COMPONENTS OF PERFORMANCE
MANAGEMENT

• KEY RESULT AREAS

• KEY PERFORMANCE INDICATORS

• GOALS
 KEY RESULT AREAS
• “Key Result Areas” or KRA's refer to general
areas of outcomes or outputs for which the
department's role is responsible.
• KRA's is the set of activities on which
performances are rated.
• Key Result Areas or KRA's refer to general
areas of outcomes or outputs for which a
role is responsible.
KEY PERFORMANCE INDICATORS
• KPIs serve as the gauges which are used to
evaluate how well you have achieved your key
results.
• KPIs split into 2 types:-
a) Direct Key Performance Indicators – relate
directly to a key result area.
b) Indirect Key Performance Indicators – apply
where it is not possible to directly measure a key
result area.
 GOALS

• These are the tools to tell how to achieve your

Key Result as per the desired standards.
• Goals should be challenging, time-bound &
measurable.
• Goals should be in line with Mission, Vision,
KRAs & KPIs.
 WHY TO IDENTIFY KRAs?

• Identifying KRAs helps individuals

– Clarify their roles.
– Set goals and objectives.
– Focus on results rather than activities.
– Align their roles to the organization’s business or
strategic plan.
– Prioritize their activities, and therefore improve
their time/work management.
– Communicate their role’s purposes to others
– Make value-added decisions.
 EXAMPLES

• For Marketing Deptt. :-

a) If KRA is Sales then KPIs will be :-
• Revenue over a given time.
• Units sold.
b) If KRA is Profit then KPIs will be :-
• To achieve annual sales.
• Annual profit achieved.
 EXAMPLES
• KRAs of Finance & Accounting include :-
1. Credit referencing
2. Capital expenditure
3. Security
4. Financial analysis
5. Cost control
6. Internal audit
7. Regulatory reporting
8. Credit control
9. Financial records
10. Payroll
11. Cash flow forecasting
12. Budgeting
13. Costing
 EXAMPLES

• KRAs of Manufacturing include :-

• elimination of wastages in production

• improving throughput efficiency
• process efficiency etc.

• KPI could be

• reducing back orders[ nil %]

• improving targeted delivery date [ 98%]
 EXAMPLE

• KRAs of Quality include :-

Quality

KPIs could be :-
• Measure defects per million.
• Knowledge of quality principles demonstrated by team.
• Measure quantity of feedback from customers.
 EXAMPLE

• KRAs of Design include :-

Introduce new products

KPIs could be :-
• No. of new products introduced in a given period.
• Percent of revenues reinvested in R&D.
 EXAMPLE

• Manufacturing
KRAs include

Stock control
Maintenance
Labour relations
Waste
Reworks
Productivity
Health and Safety
Quality control
Record keeping
 CONCEPT OF PERFORMANCE MANAGEMENT

• Performance management begins with goals. Goals define

the results that people should aim to achieve. Goals are
touchstones for performance planning, appraisal, rewards,
and improvement.
• Goal setting should be a top down process that begins in
company strategy. If, for example, the strategic goal is to
become the market share leader through rapid product
introductions, then unit goals should serve that strategy.
And individual goals should be aligned with those of their
units.
 GOALS VERSUS ACTIVITIES
GOALS Activities

• Increase sales by 10%. • Writing weekly sales

reports.
• Reduce customer turnover • Handling customer
by 15%. complaints and other
problems.
• Launch five new products • Meeting weekly to discuss
this year. new product development.
• Participating in quality-
• Cut production waste by control training program.
20%.
 Characteristics of Effective Goals
• Recognized as important.
• Clear
• Written in specific terms
• Measurable and framed in time
• Aligned with organizational strategy.
• Achievable and challenging
• Supported by appropriate rewards
 Three mistakes to avoid
• Companies fail to create performance metrics.
• They fail to align rewards with company and unit
goals
• Achievement bar is set too low
 Get it on paper
• The date of your meeting.
• Key points brought up by both parties.
• The goals the employee has agreed to pursue.
• What he or she will do to achieve them.
• The date on which the employees performance
will be formally appraised.
 Four Steps to accomplishing goals
• Break each goal down into specific tasks- with
clear outcomes.
• Plan the execution of those tasks- with
timetables.
• Gather the resources needed to fulfill each task.
• Execute the plan
360 – Degree Appraisal
It involves systematic collection of performance data
on an individual or a group, derived from a no. of
stake holders being the immediate supervisors, team
members, customers, peers & self.
The appraiser should be capable of determining
what is more important & relatively less important
factors.
He should prepare reports & make judgments
without getting biased.
 Performance
Mould
Mould employee
employee appraisal & 360 degree
behaviour
behaviour to
to company
company norms
norms feedback
Build
Build consistency
consistency of
of
employee
employee actions
actions
&
& organisation
organisation goals
goals
Improve
Improve HRHR planning,
training
training &
planning,
& succession
succession
Performance
Performance
appraisal
appraisal
Improve
Improve quality
quality
of
of salary
salary reviews
reviews

Provide
Provide record
record for
for dismissal,
dismissal, 360
360o feedback
o
feedback --
demotion,
demotion, grievance,
grievance, appeal
appeal non-hierarchical
non-hierarchical method
method
 Corporations Using 360 Degree Feedback system

• SBI
• Adithya Birla Group
• Mafatlal Group etc., are using this tool to
discover home truths about their managers.
 Merits of 360-Degree Technique
• Evaluates methods applied to achieve targets
• Reveals strengths and weakness in management
style.
• Forces inflexible managers to initiate self-change
• Creates an atmosphere of teamwork and
improvement
• Unearths truths about organizational culture and
ambience.
Demerits of 360-Degree Technique
• Ignores performance in terms of reaching
goals
• Colleague’s responses tend to be biased
• Assesses deny the truth of negative feedback
• The system can be used to humiliate people
• Linking findings to rewards can prove to be
unfair.
Recognizing Employee Contributions with Pay
After reading this chapter, you should be
able to:
Describe the fundamental pay
programs for recognizing employees'
contributions to the organization's
success.
List the advantages and disadvantages
of the pay programs.
List the major factors to consider in
matching the pay strategy to the
organization's strategy.
Recognizing Employee
Contributions with Pay
Explain the importance of process
issues such as communication in
compensation management.
Describe how U.S. pay practices
compare with those of other
countries.
 Introduction
• Organizations have a relatively large
degree of discretion in deciding how to
pay.
• Differences in performance by an
individual, group, organization,
seniority, or skills determine the pay.
• Regardless of cost differences,
different pay programs can have very
different consequences for
productivity and return on investment.
 How Does Pay Influence Individual
Employees?
Three different theories help explain compensation’s effects:

Reinforcement Theory

Expectancy Theory Agency Theory

 How Does Pay Influence Individual
Employees?
• Reinforcement Theory - A response followed by
a reward is more likely to recur in the future.
• Expectancy Theory - Motivation is a function of
valence, instrumentality, and expectancy.
• Agency Theory -The interests of the principals
(owners) and their agents (managers) may not
converge.
– Types of agency costs include:
• perquisites
• attitudes towards risk
• decision-making horizons
 Agency Costs
• Agency costs may be minimized by the principal
choosing a contracting scheme that helps align the
interests of the agent with the interests of the
principals.
• The type of contract depends partly on the following
factors:
– risk aversion
– outcome uncertainty
– job programmability
– measurable job outcomes
– ability to pay
– tradition
 Programs for Recognizing
Employee Contributions
• Programs differ by payment method, frequency of payout, and
ways of measuring performance.
• Potential consequences of such programs are performance
motivation of employees, attraction of employees, organization
culture, and costs.
• Contingencies that may influence whether a pay program fits the
situation are management style, and type of work.

Merit Pay Incentive Pay

Skill-based Profit Sharing

Gain Sharing Ownership

 Merit Pay
• Merit pay programs link performance-
appraisal ratings to annual pay increases.
• A merit increase grid combines an
employee’s performance rating with the
employee’s position in a pay range to
determine the size and frequency of his or
her pay increases.
• Some organizations provide guidelines
regarding the percentage of employees
who should fall into each performance
category.
 Merit Pay
• Deming, who is a critic of merit pay, argues that it
is unfair to rate individual performance because
"apparent differences between people arise
almost entirely from the system that they work
in, not the people themselves.”
• Criticisms of merit pay include:
– the focus on merit pay discourages teamwork.
– The measurement of performance is done unfairly
and inaccurately.
– Merit pay may not really exist.
 Individual Incentives
• Individual incentives reward individual performance,
but payments are not rolled into base pay, and
performance is usually measured as physical output
rather than by subjective ratings.
• They are relatively rare because:
– Most jobs have no physical output measure.
– There are many potential administrative problems.
– Employees may do what they get paid for and nothing else.
– They typically do not fit in with the team approach.
– They may be inconsistent with organizational goals.
– Some incentive plans reward output at the expense of
quality.
 Profit Sharing
• Under profit sharing, payments are
based on a measure of organization
performance (profits), and payments
do not become a part of base pay.
– An advantage is that profit sharing may
encourage employees to think more like
owners.
– The drawback is that workers may
perceive their performance has little to
do with profit but is more related to top
management decisions over which they
have little control.
 Ownership
• Ownership encourages employees to focus on the
success of the organization as a whole, but, like profit
sharing, may not result in motivation for high individual
performance.
• One method to achieve employee ownership is through
stock options, which give employees the opportunity to
buy company stock at a fixed price.
• Employee stock ownership plans (ESOPs) are employee
ownership plans that give employers certain tax and
financial advantages when stock is granted to employees.
– ESOPs can carry significant risk for employees.
 Gainsharing
• Gainsharing programs offer a means for sharing productivity gains
with employees, and are based on group or plant performance that
does not become part of the employee’s base salary.
• Conditions that should be in place for gainsharing to be effective
include:
– management commitment
– the need to change or a process of continuous improvement
– management's acceptance and encouragement of employee input
– high levels of cooperation and interaction
– employment security
– information sharing on productivity and costs
– goal setting
– commitment and agreement of all parties
– standards that are understandable, fair, and related to objectives.
Group Incentives and Team
Awards
• Group incentives tend to
measure performace in terms of
physical output
• Team award plans may use a
broader range of performance
measures.
• Drawbacks are that individual
competition may be replaced by
competition between teams.
 Balanced Scorecard
• Some companies design plans that combine
various elements of the above programs that
are appropriate to the situation.
• The four categories of a balanced scorecard
include:
– financial
– customer
– internal
– learning and growth
 Managerial and Executive Pay
• Top managers and executives are a strategically
important group whose compensation warrants
special attention.
• In some companies rewards for executives are high
regardless of organizational performance.
• Executive pay can be linked to organizational
performance (from agency theory).
• There has been increased attention to executive
pay from regulators.
– The Securities and Exchange Commission (SEC)
 Process and Context Issues
Three issues represent areas of significant company
discretion and pose opportunities to compete effectively:

Employee Participation
in Decision Making

Intertwined Effects of
Communication
Pay and Process
 Matching Pay Strategy and
Organization Strategy

Organization Strategy
Pay Strategy Dimensions Concentration Growth
Risk Sharing Low High
Time Orientation Short-term Long-term
Pay Level (short-run Above Market Below Market
Pay Level (long-run) Below Market Above Market
Benefit Level Above Market Below Market
Centralization of Pay Decisions Centralized Decentralized
Pay Unit of Analysis Job Skills