To understand:

- Total Reward Systems

- Money as an economic and social medium of exchange

- The role of money in motivational models

- Behavioral considerations in performance appraisal

- The characteristics of good feedback programs

- The process of attribution

- How and why to link pay with performance

- Uses of profit-sharing, gain-sharing, and skill-based pay programs

Money is important to employees for a number of reasons. Certainly, money is valuable because of the goods and services it will purchase. This aspect is its economic value as a MEDIUM OF EXCHANGE for allocation of economic resources.

However money is also a SOCIAL MEDIUM OF EXCHANGE because of the status symbol it provides by representing to employees what their employer thinks of them.
It is also an indication of one's employee's status relative to that of other employees.

A useful way to think about money as a reward is to apply it to some of the motivational models presented in chapter 5:

DRIVES - Achievement-oriented employees maintain a symbolic scorecard in their minds by monitoring their total pay and comparing it with that of others.

NEEDS - In the Herzberg model, pay is viewed primarily as a hygiene factor, i.e. maintenance factors that are necessary to avoid dissatisfaction but that by themselves do not provide satisfaction, like having good working conditions and getting along with your boss.

EXPECTANCY - The theory proposes that an individual will decide to behave or act in a certain way because they are motivated to select a specific behavior over other behaviors due to what they expect the result of that selected behavior will be. In essence, the motivation of the behavior selection is determined by the desirability of the outcome.
This theory emphasizes the needs for organizations to relate rewards directly to performance and to ensure that the rewards provided are those rewards DESERVED and WANTED by the recipients.

Formula: Valence (wanting more of something) X Expectancy (effort will be successful in desired performance) X Instrumentality (monetary reward will follow better performance) = Motivation

EXTRINSIC REWARDS - Positively valued work outcomes given to the individual by some other person.

Ex: Money or higher salary.

INTRINSIC REWARDS - Positively valued work outcomes that the individual receives directly as a result of task performance.

Ex: personlal satisfaction for a job well done.

Note: Money is essentially an extrinsic reward rather than an intrinsic one, so it is easily administered in behavior modification programs.

Management by objectives (MBO) is a process of defining objectives within an organization so that management and employees agree to the objectives and understand what they need to do in the organization in order to achieve them.
The essence of MBO is participative goal setting, choosing course of actions and decision making. An important part of the MBO is the measurement and the comparison of the employee’s actual performance with the standards set. Ideally, when employees THEMSELVES have been involved with the goal setting and choosing the course of action to be followed by them, they are MORE LIKELY to fulfill their responsibilities.

A performance appraisal (PA) is a method by which the job performance of an employee is documented and evaluated. Performance appraisals are a part of career development and consist of regular reviews of employee performance within organizations.

Six reasons why performance appraisals are important:

1) Allocate scarce resources in a dynamic environment
2) Motivate and reward employees
3) Give employees feedback about their work
4) Maintain fair relationships within groups
5)Coach and develop employees
6) Comply with regulations

The modern appraisal philosophy are as follows:

1) PERFORMANCE ORIENTATION - it is not enough for employees to put forth effort; that effort must result in the attainment of desired outcomes.

2) FOCUS ON GOALS - employees need to have a clear idea of what they are supposed to be doing and the priorities among their tasks.

3) MUTUAL GOAL SETTING BETWEEN SUPERVISOR AND EMPLOYEE -
this is the belief that people will work harder for goals or objectives that they have participated in.

4) CLARIFICATION OF BEHAVIORAL EXPECTATIONS -
brief descriptions of outstanding, very good, acceptable, below average, and unacceptable behaviors are specified for each major dimension of a job thus cueing the employee in advance regarding the organizations expectations.

5) EXTENSIVE FEEDBACK SYSTEMS -
employees can fine-tune their performance better if they know how they are doing in the eyes of the organization, and receive this information regularly and candidly.

The appraisal interview is a session in which a supervisor provides feedback to the employee on past performance, discusses any problems that have arisen, and invites a response.
Employers who base their personnel decisions on the results of a well-designed performance review program that includes formal appraisal interviews are much more likely to be successful in defending themselves against claims of discrimination.

Necessary criteria are in place to ensure equal employment opportunity in the performance appraisal system:

- It is an organizational necessity

- It is based on well-defined, objective criteria

- It is based on careful job analysis

- Uses only job-related criteria

- It is supported by adequate studies

- It is applied by trained, qualified raters

- It is applied objectively throughout the organization

- It can be shown to be nondiscriminatory as defined by law

Employee self-assessments, or self-appraisals, gives employees an active role to play. Rather than simply being the "recipient" of feedback from their manager, the employee is given a voice, and can inform or shape their performance appraisal and ratings. This active participation helps them to be more engaged with both their performance and the review process overall.

All appraisal systems build on the assumption that employees need feedback about their performance. Feedback helps them know what to do and how well they are meeting their goals. Assuming that performance is satisfactory or better, feedback enhances an employee's self-image and feeling of competence. Generally, performance feedback leads to both improved performance and improved attitudes - if handled properly by the manager. However, it has been the experience of many managers that giving critical or constructive feedback to their employees could prove to be a very challenging task to perform. Poorly phrased feedback accusingly attacks the person rather than behavior, fails to provide useful illustrations, remains abstract and confusing, and makes global assertions that can easily be refuted by the recipient.

Another possible reason for poor feedback (i.e. not having enough valid information to create a substantive conclusion) - can be overcome by the use of 360-degree feedback.
This is the process of systematically gathering data on a person's skills, abilities, and behaviors, from a variety of sources - the managers, peers, subordinates, and even customers or clients.
It may be contrasted with "upward feedback," where managers are given feedback only by their direct reports, or a "traditional performance appraisal," where the employees are most often reviewed only by their managers.

The results from a 360-degree evaluation are often used by the person receiving the feedback to plan and map specific paths in their development. Results are also used by some organizations in making administrative decisions related to pay and promotions. When this is the case, the 360 assessment is for evaluation purposes, and is sometimes called a "360-degree review." However, there is a great deal of controversy as to whether 360-degree feedback should be used exclusively for development purposes, or should be used for appraisal purposes as well.

The list of attributions:

- SELF-SERVING BIAS:
claiming undue credit for their success and minimizing their own responsibility for problems

- FUNDAMENTAL ATTRIBUTION BIAS -
people tend to attribute achievement to good luck or easy tasks, and they assume that others failed to try hard enough or simply lacked the appropriate personal characteristics or overall ability if they failed

- PERCEPTUAL SET -
people tend to perceive what they want to perceive

- SELF-FULFILLING PROPHESY (THE PYGMALION EFFECT)-
this suggests that a manager's expectations for an employee may cause the manager to treat the employee differently and that the employee will then respond in a way the confirms the initial expectations

- GALATEA EFFECT -
this is the psychological process in which high expectations by the employees themselves lead to higher performance

An economic incentive system is a process of measures that uses material means to motivate employees to induce a higher level of individual, group, or organizational performance. Managing employee or system performance and aligning their objectives facilitates the effective delivery of strategic and operational goals.

Benefits of performance management may include:

DIRECT FINANCIAL GAIN
- Grow sales
- Reduce costs in the organization
- Stop project overruns
- Aligns the organization directly behind the CEO's goals
- Decreases the time it takes to create strategic or operational changes by communicating the changes through a new set of goals

MOTIVATED WORKFORCE
- Optimizes incentive plans to specific goals for over achievement, not just business as usual
- Improves employee engagement because everyone understands how they are directly contributing to the organizations high level goals
- Create transparency in achievement of goals
- High confidence in bonus payment process
- Professional development programs are better aligned directly to achieving business level goals

Here is a list of possible disadvantages:

- Cost
- System complexity
- Declining or variable pay
- Union resistance
- Delay in receipt
- Rigidity of system
- Narrowness of performance

Wage Payment Systems, or incentives, are the different methods adopted by organizations by which they compensate for labor. Basically, wage incentives, which are a form of merit pay, provide more pay for more output or results, often referred to as "pay for performance". However this is a complex process that could lead to many difficulties:

1) RATE SETTING -
this is the process of determining the standard output for each job which is highly subjective

2) SUPERVISOR ROLE -
supervisors must be familiar with the system so they can explain it to employees. Paperwork increases, resulting in greater chance of error and more employee dissatisfaction.

3) LOOSE RATES -
a rate is considered "loose" when employees are able to reach standard output with less than reasonable levels of effort. When management adjusts the rate to a higher standard, employees predictably experience a feeling of inequity.

4) INCENTIVE WORKERS VS. HOURLY WORKERS-
wage incentives may cause disharmony between incentive workers and hourly workers. Hourly workers may feel discriminated against because they earn less.

5) OUTPUT RESTRICTION -
i.e. workers limit their production and thus defeat the purpose of the incentive. One reason for this phenomenon is the fact that people aren't always comfortable working at full capacity.

PROFIT SHARING refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses. In publicly traded companies these plans typically amount to allocation of shares to employees.

GAIN-SHARING is a system to increase profitability by motivating employees to improve their performance through involvement and participation. As their performance improves, employees share financially in the gain. Gain-sharing’s goal is to improve performance and eliminate waste (time, energy, and materials) by motivating employees to work smarter as a team rather than just working harder.

Skill-based pay systems are based on the idea that employees will be proactive in obtaining new, job-related skills if they are compensated for such efforts. This is a basic principle of behavioral psychology: actions that lead to rewards will be repeated.
The underlying concept behind a skill-based pay system is relatively simple: increase an employee’s compensation as he or she acquires and becomes more proficient with job-related skills.

ADVANTAGES:
- Provides strong motivation for employees to develop their work-related skills
- Reinforces an employee's self-esteem
- Provides the organization with a highly flexible workforce that can fill in when someone is absent

DISADVANTAGES:
- Cost (i.e. paying higher salaries)
- Substantial investment in time, money, and resources
- Puts pressures on employees to move up the skill ladder
- Some employees wil qualify themselves for skill areas that they will be unlikely to use, causing the organization to pay them higher rates than they deserve from a performance standpoint

Economic rewards provide social as well as economic value. They play a key role within several motivational models, blending with expectancy, equity, behavior modification, and need-based approaches.

Performance appraisals provide a systematic basis for assessment of employees contributions, coaching for improved performance, and distribution of economic rewards.