www.downloadslide.com Chapter Six Applied Performance Practices 159 profit-sharing plan a reward system that pays bonuses to employees on the basis of the previous year’s level of corporate profits described at the beginning of this chapter, awards stock options to most of its employees. Here’s how stock options work: An employer might offer employees the right to purchase 100 shares at $50 each at any time between two and six years from now. If the stock price is, say, $60 two years later, employees could earn $10 per share from these options, or they could wait up to six years for the stock price to rise further. If the stock price never rises above $50 during that time, employees are “out of the money,” and they would let the options expire. The intention of stock options is to motivate employees to make the company more profitable, thereby raising the company’s stock price and enabling them to reap the value above the exercise price of the stock options. Another type of organizational-level reward is the profit-sharing plan, in which employees receive a percentage of the previous year’s company profits. An interesting application of this reward occurs at Svenska Handelsbanken AB. In years when the Swedish bank is more profitable than the average of competing banks, it transfers onethird of the difference in profits to an employee fund. Every employee receives one share in the fund for each year of service, which can be cashed out at 60 years of age (even if they continue working for the bank beyond that age). 29 Evaluating Organizational-Level Rewards How effective are organizational-level rewards? Research indicates that ESOPs and stock options tend to create an ownership culture in which employees feel aligned with the organization’s success. 30 There is also some evidence that both increase firm performance under some circumstances, but the effects are fairly weak. 31 Profit sharing tends to create less ownership culture, yet one major study of 200 Korean manufacturing firms found that it had a stronger influence on productivity than did ESOPs or stock options. 32 Profit sharing also has the advantage of automatically adjusting employee compensation with the firm’s prosperity, thereby reducing the need for layoffs or negotiated pay reductions during recessions. One reason why organizational rewards don’t improve motivation or performance very much is that employees perceive a weak connection between their individual effort and the determinants of those rewards (i.e., corporate profits or stock price). Even in small firms, the company’s stock price or profitability are influenced by economic conditions, competition, and other factors beyond the employee’s immediate control. This low individual performance-to-outcome expectancy suppresses the incentive’s motivational effect. However, a few studies have found that ESOPs and other organizational rewards have a more robust influence on motivation and firm performance when employees are also involved in organizational decisions. 33 We discuss employee involvement in the next chapter (Chapter 7). Improving Reward Effectiveness 6-2 Performance-based rewards have come under attack over the years for discouraging creativity, distancing management from employees, distracting employees from the meaningfulness of the work itself, and being quick fixes that ignore the true causes of poor performance. One study even found that very large rewards (relative to the usual income) can result in lower, rather than higher, performance. 34 While these issues have kernels of truth under specific circumstances, they do not necessarily mean that we should abandon performance-based pay. On the contrary, top-performing companies are more likely to have performance-based (or competency-based) rewards, which is consistent with evidence that these rewards are one of the high-performance work practices (see Chapter 1). 35 Reward systems do motivate most employees, but only under the right conditions. Here are some of the more important strategies for improving reward effectiveness.
www.downloadslide.com 160 Part Two Individual Behavior and Processes debating point IS IT TIME TO DITCH THE PERFORMANCE REVIEW? More than 90 percent of Fortune 500 companies use performance reviews to link rewards to the performance of some or most employees. Advocates argue that these evaluations provide critical documentation, communication, and decisions necessary to reward contributors and remove those who fail to reach the minimum standard. Indeed, it can be difficult to fire poor performers in some jurisdictions unless the company has systematically documented the employee’s shortfalls. Evaluations provide clear feedback about job performance, so employees know where they stand and are motivated to address their weaknesses. Performance reviews have their faults, but supporters say these problems can be overcome by using objective information (such as goal setting and 360-degree feedback) rather than subjective ratings, being supportive and constructive throughout the review, and providing informal performance feedback throughout the year. Several experts—and most employees—disagree. 36 In spite of mountains of advice over the years on how to improve performance reviews, this activity seems to inflict more damage than deliver benefits. Apple Inc. trashed its formal performance evaluation process a decade ago. Zappos and dozens of other companies have since followed Apple’s lead. Most companies that ditched their performance reviews never brought them back again. According to various polls and studies, performance reviews are stressful, morale sapping, and dysfunctional events that typically descend into political arenas and paperwork bureaucracies. Even when managers actively coach employees throughout the year, the annual appraisal meeting places them in the awkward and incompatible role as an all-powerful and all-knowing evaluator. Another issue is that rating employees, even on several factors, grossly distorts the complexity of performance in most jobs. A single score on customer service, for instance, would hide variations in knowledge, empathy, efficiency, and other elements of service. “Who am I to tell somebody they’re a three out of five?” asks Don Quist, cofounder of industrial recruiting firm Sixth Sense and engineering firm Hood Group. Quist is so opposed to performance reviews that employees at Hood Group were issued badges with a big “X” through the phrase “Employee Evaluation.” 37 Many perceptual biases—halo, recency, primacy, stereotyping, fundamental attribution error—are common in performance reviews and difficult to remove through training. Seemingly objective practices such as goal setting and 360-degree feedback are fraught with bias and subjectivity. Various studies have also found that managers across the organization use different criteria to rate employee performance. One study discovered that management’s evaluations of 5,000 customer service employees were unrelated to ratings that customers gave those employees. “The managers might as well have been rating the employees’ shoe sizes, for all the customers cared,” quipped one investigator. 38 Is there an alternative to the performance evaluation? One repeated suggestion is to conduct “performance previews” or “feedforward” events that focus on future goals and advice. Instead of a postmortem dissection of the employee’s failings, managers use past performance as a foundation for development. 39 Also, substantial rewards should never be based on performance reviews or similar forms of evaluation. Instead, they should be linked to measurable team- and organizational-level outcomes and, judiciously, to individual indicators (sales, project completion, etc.), where appropriate. LINK REWARDS TO PERFORMANCE Organizational behavior modification theory and expectancy theory (Chapter 5) both recommend that employees with better performance should be rewarded more than those with poorer performance. Unfortunately, this simple principle seems to be unusually difficult to apply. Few employees see a relationship between job performance and the amount of pay they and coworkers receive. One recent global survey reported that only 42 percent of employees globally say they think there is a clear link between their job performance and pay. Only 25 percent of Swedish employees and 36 percent of American employees see a pay–performance link. 40 How can companies improve the pay–performance linkage? Inconsistencies and bias can be minimized through gainsharing, ESOPs, and other plans that use objective performance measures. Where subjective measures of performance are necessary, companies should rely on multiple sources of information. Companies also need to apply rewards soon after the performance occurs, and in a large-enough dose (such as a bonus rather than a pay increase), so employees experience positive emotions when they receive the reward. 41