Chapter 2 MC

Results Controls

Influence on Behavior in Organizations

  • Pay-for-performance is a common motivator in organizational behavior.

  • Example: Thor Industries, CEO Wade Thompson credits success to an incentive compensation system that shares 15% of each division's pretax profits with managers.

    • Philosophy: Aligns managers' interests with company success—"If they don’t perform, they don’t get paid very much. If they do, there is no cap."

  • Insights from Vicky Wright at Hay Group: Successful CEOs understand performance measurement and its link to motivation and rewards.

Results Control Framework

  • Results Control Defined

    • It rewards employees based on the achievement of good results, tied to various performance measures.

  • Critique of Pay-for-Performance

    • Post-financial crisis, scrutiny on these systems due to issues like short-termism and unethical behavior (e.g., bonuses encouraging corner-cutting).

    • Call for reforms to tie compensation to long-term value creation rather than immediate financial results.

Applications Across Sectors

  • Healthcare Example: National Health and Hospitals Reform Commission in Australia

    • Critiques fee-for-service models incentivizing quantity over quality of care.

    • Recommendations include linking pay to effectiveness of treatments.

  • U.S. models consider incentives for efficiency and quality to improve health outcomes and save costs (e.g. decisions made before Medicare trust fund depletes).

Efficacy and Consequences of Results Controls

  • Evidence shows mixed results regarding effectiveness—often the desired achievements are not realized or can lead to adverse outcomes.

  • Rewards for performance can extend beyond monetary compensation:

    • Job security, promotions, autonomy, recognition.

  • Meritocracy created through results controls ensures rewards go to talented, high-performing employees.

  • Example: Koch Industries emphasizes both meritocracy and operational efficiency, allowing workers to earn significantly based on performance.

Implementation of Results Controls

Steps for Effective Results Controls

  1. Define Desired Results

  2. Measure Performance

  3. Set Targets

  4. Provide Rewards for Achievement

  • Defining Performance Dimensions: Align stakeholders’ interests (owners, employees, customers).

    • Balancing trade-offs between shareholder value, customer focus, employee satisfaction.

  • Measurement Mechanisms: Performance can be measured using:

    • Objective financial metrics (net income, return on assets).

    • Non-financial metrics (customer satisfaction).

Setting Performance Targets

  • Clear, specific goals motivate and provide a benchmark for employee performance evaluation.

  • Example: A nurse evaluates performance through quantifiable goals such as infection rates and patient satisfaction.

Framework for Rewards

  • Rewards or incentives should align with what employees value (e.g., salary, job security, recognition).

    • Understand motivational theories:

      • Expectancy Theory:

        • Motivation depends on belief that effort leads to desired outcomes and the desirability of those outcomes.

Conditions for Effectiveness of Results Controls

  1. Knowledge of Desired Results: Clear understanding and communication of objectives.

  2. Influence on Results (Controllability): Employees must have significant control over the outcomes they are evaluated on.

  3. Effective Measurement: Results must be measurable and reflect meaningful performance metrics.

Challenges and Limitations

  • Controllability issues arise when external factors impact results.

  • Measurement challenges due to inaccuracies or biases in data.

  • Potential for misalignment between desired outcomes and performance measures, leading to unintended consequences in employee motivation and actions.

Conclusion

  • Results controls are essential for indirect management of employee behavior, allowing autonomy while maintaining accountability for outcomes.

  • They are powerful tools but must be carefully designed and implemented, considering the conditions that determine effectiveness.