Chapter 12: Recognizing Employee Contributions with Pay Flashcards

Comprehensive practice flashcards covering employee compensation systems, motivation theories, agency theory, and various pay-for-performance programs.

What is the definition of pay for performance?

A compensation system where an employee's pay depends on how well they perform their job.

According to the transcript, what factors besides performance can be used as a basis for differentiating pay?

Seniority and skills.

What are the three main purposes of pay for performance?

To motivate employees to work harder, reward high performers, and align employee effort with company goals.

What is the 'Incentive Effect' regarding pay plans?

It is how a company's pay system influences the behavior and performance of its current employees.

Which four theories should be considered in compensation according to the lecture?

Equity Theory, Reinforcement Theory, Expectancy Theory, and Agency Theory.

What is the core principle of Reinforcement Theory?

A response followed by a reward is more likely to recur in the future.

In Reinforcement Theory, what makes future high performance more likely?

High employee performance followed by a monetary reward.

Who proposed the Expectancy Theory, and in what decade?

Victor Vroom in the 1960s.

What is the fundamental suggestion of Expectancy Theory regarding motivation?

Individuals are motivated to perform better when they believe their efforts will lead to desired outcomes.

What are the three core components that multiply to determine motivation in Vroom's model?

Expectancy, Instrumentality, and Valence.

How is 'Expectancy' defined in the context of the sales quota example?

The belief that if one really works hard, they can hit the sales quota (often because they have done it before).

How is 'Instrumentality' defined in the context of employee rewards?

The trust that if an employee hits a target (like a quota), they will actually receive the promised reward (such as a $P20,000$ bonus).

What does 'Valence' refer to in Expectancy Theory?

Whether the individual finds the specific outcomes or rewards desirable and meaningful.

What is extrinsic motivation?

Motivation that depends on rewards, such as pay and benefits, controlled by an external source.

What is intrinsic motivation?

Motivation that depends on rewards that flow naturally from the work itself.

What is the relationship between extrinsic incentives and intrinsic motivation according to the lecture notes?

Extrinsic incentives generally do not have an adverse effect on intrinsic motivation.

What is the focus of Agency Theory?

The divergent interests and goals of an organization's stakeholders, specifically the principal and the agents.

In Agency Theory, who is the 'Principal'?

The owner or boss, such as company owners or shareholders.

In Agency Theory, who is the 'Agent'?

The employee or manager who works for the principal.

What is the primary goal of using compensation within Agency Theory?

To align the goals of the agents with the best interests of the principals.

What are the two main causes of agency costs?

Goal incongruence and information asymmetry.

What are three examples of activities that generate agency costs?

Monitoring employees, setting rules, and creating incentive systems.

What are 'outcome-oriented contracts' in Agency Theory?

Contracts tied directly to results, such as stock options, profit sharing, or commissions.

What is a 'behavior-based contract'?

A contract that rewards the way an employee works, such as merit pay.

What is the 'Sorting Effect'?

The phenomenon where individual pay programs affect the nature and composition of an organization's workforce.

How does the Sorting Effect impact high performers?

Linking pay to performance may attract and retain more high performers.

What personality traits are typically attracted to high commission pay jobs?

Confident, competitive, and risk-taking people.

What type of people does a fixed salary with no bonuses typically attract?

People who want security and stability.

In a performance-based bonus system, what is the likely outcome for low performers?

They may leave the company because they earn less.

What is 'incentive intensity'?

The strength of a differentiation in performance and pay; while it strengthens motivation, it also increases the chance of unintended consequences.

What are the three dimensions on which pay programs differ?

Whether payouts are part of base pay (fixed vs variable), whether measures are subjective or objective, and whether performance is individual or organizational.

How is 'merit pay' defined?

Annual base pay increases usually linked to performance appraisal ratings, resulting in a permanent increase to base salary.

What are 'merit bonuses'?

One-time, lump-sum payments for achieving specific goals that do not become part of base pay.

What three factors determine a merit increase grid?

Performance rating, compa-ratio, and the distribution of performance ratings.

In traditional merit pay programs, where is most performance information collected from?

The immediate supervisor.

How frequently does feedback typically occur in traditional merit pay programs?

Infrequently, often once per year at a formal performance review session.

Are payments from 'individual incentives' rolled into base pay?

No, they are not rolled or added into base pay; they must be continuously earned and re-earned.

How is performance usually measured for individual incentives?

By physical output rather than subjective ratings.

In the warehouse example, how much extra does an employee earn per 50 units packed above quota?

$\text{₱100}$.

What is profit sharing?

Payments based on a measure of organization performance (profits) that do not become part of the base salary.

How is the distribution of money determined in a profit-sharing plan?

A predetermined percentage of profits is set aside and allocated based on factors like individual performance or tenure.

What is an employee stock ownership plan (ESOP)?

A type of employee ownership plan.

What are stock options?

An opportunity given to employees to buy the company's stock at a previously fixed price.

What is 'Gainsharing'?

A program that sharing the gains achieved through increased productivity, cost reduction, or operational improvements.

What does Gainsharing specifically measure?

Group or plant performance.

Why is Gainsharing often more motivating than profit sharing?

Payouts are more frequent and employees feel they are more in control of the outcomes.

In the manufacturing example for Gainsharing, how much is saved in waste through efficiency?

$\text{₱500,000}$.

What is a potential negative side effect of group incentives and team awards?

They may increase competition between groups or demotivate top performers.

What is the purpose of a Balanced Scorecard in compensation?

To use a mix of pay programs to balance multiple objectives beyond just profit or sales.

What are the four categories of a Balanced Scorecard?

Financial, Customer, Internal processes, and Learning and growth.

Which dimension of the Balanced Scorecard includes revenue and return on investment?

Financial.

Which dimension of the Balanced Scorecard includes employee training and innovation?

Learning and growth.

What is the likely outcome for an employee with a high performance rating who is already earning above the salary range midpoint?

They will receive a smaller salary increase.

What are the benefits of employee participation in decision making regarding compensation?

It is linked to higher pay satisfaction and job satisfaction.

What is a potential cost of delegating decision making to employees?

It creates agency costs.

What is the relationship between HR programs and organizational outcomes?

Programs do not work alone; they have interconnected effects on productivity, participation, and profitability.