Paying for non-performance?

In a commentary dated 15 December 2007 on “money not enough?” the issues of pay for performance were explored. As discussed, compensation of chief executives and senior management of private enterprises have been under scrutiny by stakeholders. Stakeholders are utterly disgusted at the manner senior managers reward themselves regardless of company performance.

Although the westernised idea of paying for performance has been embedded as the reward strategy in many organizations, the question of paying for whose performance is pertinent. Are we paying company directors, chief executives and senior managers of organizations for their performance such that we may ultimately be “rewarded”? Or, are senior managers paying themselves handsomely for their own “performance”, even to the extent of behaving fraudulently to satisfy their greed addiction.

One need to go no further than to examine the classic case of Enron to understand why pay for (whose?) performance led to the collapse of the organisation. More recently, the collapse of Opes Prime in Australia wiped out millions of dollars of pension funds; First Capital suffered similar fate, and most recently, Victorian stock broking firm in Geelong, Australia has allegedly been behaving badly.

As the economy is flushed with more money and ready credit, greed had consumed some of us, allowing us to be extremely creative in feeding our greed addiction. As an example, the work performance of a loan officer is measured on the amount of credit that is booked for a given period. To secure higher book value, a bank credit officer may resort to unconventional means of earning performance bonus by offering higher credit to its customers, often ignoring their ability to service loans. Hence, many of us have continually been seduced by financial institutions offering pre-approved increases on credit cards limit, or re-financing homes with subsequent mortgages without much effort or difficulty.

For many years, organizations embrace pay for performance as the panacea for driving desired behaviours towards cash and more cash, often ignoring behavioural integrity, ethics or legal considerations. Edward Lawler III, an authority in compensation management once argued against the effectiveness of pay for performance in “why is pay no longer an incentive to better job performance".

Another commentator, Michael de Beer suggested that careful efforts to design an incentive system to make pay contingent on performance may be misguided, and raised questions on the worldwide trend towards the use of more executive incentives. However, many organisational practitioners are still paying extraordinary attention to pay for performance.

Perhaps, it is the idea of pay for performance, but whose performance? Are practitioners familiar with the notion of pay for non-performance?

The notion of performance based pay is rather complex. There are research conducted on pay and performance and on the causation between risks and rewards; the higher the risk, the greater the rewards.

For an economist, pay for performance is grounded on the theory of incentives known as the agency theory. Agency theory, also known as the principal-agent model presupposes the association between time and effort. The employee may influence the amount of work accomplished, by exerting himself, but he cannot control output entirely, because his work performance may not entirely under his control.

Under the agency model, the employee is assumed to be averse to both effort and risk. If an employee is effort averse, then incentives must be designed to get the employee to exert himself. As the employee is also risk averse, the question of tradeoffs between an employee and the employer sharing the risk is pertinent. Risk is in the balance.

As work performance may be beyond the control of the employee doing the work, pay for performance may perhaps be labeled appropriately as pay for effort. Hence, we find ourselves in a flurry of activities, as we are measured on the amount of noise we generate, and not on work related performance.

From a principle-agent perspective, the moral hazard of pay for performance is pertinent. Moral hazard is defined as the ‘‘actions or in-actions carried out by the agent that are unobservable by the principal’’ When the actions of the agent are unknown and cannot be evaluated by the principal, the principal’s ability to enforce the agency contract is hampered. Senior managers control organizational resources and know most about the organization’s activities; this allows them to act opportunistically to the detriment of shareholders.

Because of their superior information and shareholders’ lack of full observation, managers can take actions that will maximize their rewards; but their actions may harm organizational performance in the long run and result in losses to the principals.

In the words of Gordon Gekko, “greed is good, greed is right, greed works, greed clarifies, cuts through and captures the essence of evolutional spirit”. Based from the collapses of organizations involving billions of dollars, is greed really good especially if pensions are wiped out almost completely overnight. Fortunately, the Central Provident Fund of Singapore manages pension of Singaporeans. At least, our superannuation are bolted under lock and key. Otherwise, we may suffer the same fate as the Australians that invested with the likes of Opes Prime et al. Trust is definitely in the balance.

Perhaps, pay for performance may actually be misguided as it will fuel more corporate collapse.

Should we continue to pay for non-performance?

An employer's dilemma?

The question of “can we work anywhere we please so long as we get the work done” is pertinent for instituting a work-life balance policy in an organization. Are flexible working arrangements and unstructured work environments crucial for recruiting and retaining talented people? A recent report suggests that "shoo-ing workaholics out of office" may be the answer for a Singaporean mid sized law firm.

http://www.todayonline.com/pdf_main.asp?pubdate=20080314

In Singapore, the year 2007 ended with “money” talk. With an extremely competitive labour market, cash and more cash were thrown at people, particularly talented people to attract, and retain them. While this “old school” approach appears effective until greed consumes some of them, practitioners are focusing on non-cash compensation to engage talented employees to “keep you in business”.

It has been reported that organizations are pursuing non-cash compensation solutions. About 53 per cent of the organizations in a survey offer opportunities for continuous learning. Others cite improving work-life balance (49 per cent), improving staff engagement (31 per cent) and faster promotion (30 per cent).

Before we rush into creating innovative non-cash compensation solutions to attract and retain talented local and foreign people, it is important to realize that non-cash compensation solutions may be workable only if salaries are attractive and competitive.

From employees' perspective, cash compensation is normally not swappable with non-cash compensation. While we attempt to carve out current cash compensation to fund non-cash compensation items, employees perceive intangible benefits as entitlement. Carving out cash compensation to fund additional employee benefits are often perceived as a reduction in salary.

Should additional benefits to be introduced in organizations be carved out of their current compensation? Cognitively possible, but emotionally difficult to implement.


http://www.todayonline.com/pdf_main.asp?pubdate=20080315

Perhaps, the dilemma for employers is the spiraling wage costs. "Will spiraling wage costs scare away business?" An economist with the Singaporean UOB Bank did not think it will. Other advantages, according to the UOB economist, such as "a high quality of manpower, transparency and efficiency, and good infrastructure are what continues to attract businesses here.”

We assumed a causation between productivity and wages ; if productivity leads wages, there is no real cause for concern. But then, the concept of "productivity" is continually abused by government agencies to justify for spiraling wage costs, and increases in the cost of conducting business. Regardless, spiraling wage costs is still a cause for concern even if productivity leads wages.

An employer's dilemma is not so much as to offer innovative employee benefits to attract and retain talented people. What is most pertinent is the costs of providing for intangible benefits.

Human resource management practitioners may not be comfortable with the mathematics of actuarial science, financial modeling and life-choice simulations. Hence, the cost of non-tangible benefits may not be computed and thus, unaccounted for. We may be in for a rude shock if we compute the total costs of providing non-cash compensation to employees.

Where benefits are offered to employees, it may be difficult to swap them for other benefit items, or withdrawn from employees when dated. This is the main reason why organizations continue to "grand-fathering" dated benefits that were once offered to employees.

The dilemma of employers is the unseen costs of providing non-cash compensation to employees, talented or otherwise.

Never mind the rising rentals, really?

http://www.todayonline.com/articles/241170.asp

Can we work anywhere we please so long as we get the job done?

One of the most difficult question facing employers is on “how to keep the people who keep you in business”. As history reveals, the traditional method to attract and retain talented people is to throw money and more money at them. While this “old school” approach appears effective until greed consumes some of them, an appealing solution is to engage talented employees particularly the younger generation with flexible work practices.

According to Marcia Hall, owner of Reputation Counts, an American Severna Park-based firm that provides workforce development and productivity training, a work-life balance is particularly important to members of the "millennial generation" who were born in the early 1980s. They not only grew up under intense pressure to get into the best schools but also have become more aware of their mortality with the terrorist attacks of Sept. 11, 2001, and other tragic events, she said. "The effect has been that their tomorrow is unpredictable," Ms. Hall said. "That means time for family and time for their personal life."

Money isn't the key to keeping Kiwi workers either - it's improving their work-life balance and supporting their careers. Remuneration consultants DSD Consulting reported on the importance of work life balance in their recent remuneration and market trends survey of 65 leading companies in New Zealand.

"Companies need to realize that, for many New Zealanders, their career and work-life balance is increasingly important. They want to work and be appreciated for what they do but they also want to be able to spend time with their families and pursue their other interests," says DSD director Susan Doughty.

DSD says the research shows bosses also need to accept that Generation Y employees don’t stay in jobs more than three or four years, so notions such as long-service bonuses don't appeal anymore. Employers need to think differently to remain interesting to their work force, especially when unemployment is so low and jobs are readily available.

Technology has allowed people to stay connected from anywhere. Perhaps, flexible working practices and "family-friendly policies" that help employees achieve a balance between work and life should be the alternate reward management practice as baby boomers retire later and employers search for talented people in a tight labor market.

With escalating fuel prices, additional taxi fee surcharges, increase on mass rapid transport (MRT) and bus fares, and more recently, an increase in the number of electronic road pricing gantries in Singapore, there is really no merit in merit pay increase.

Compensation and benefits management practitioners need to work harder than simply rely on benchmarked salary surveys to stay on the job. Instead of the 5 C’s in Singapore, "we talk about the four Fs being the key to what employees value - that's finance, future, fun and features. It's the combination of pay with a range of other factors - both financial and non-financial - that determines whether your staff will stay or not." DSD director, Una Diver commented.

Should we rethink the traditional boundaries of a “9 to 5” workday? Are flexible working arrangements and unstructured work environments crucial for recruiting and retaining talented people? Can we cultivate a flexible work culture by allowing people to work anywhere they please so long as they get the job done. Can we retain employees by introducing job sharing?

More importantly, can we work anywhere we please so long as we get the job done relevant to the (overseas)Chinese work communities?

Is there merit in merit pay increase?

In a statement released yesterday, ECA International, a global association of human resource practitioners says that Singapore workers can expect their pay to go up by an average of 5 per cent in 2008 as compared to last year's average increase of 4.5 per cent. However, inflation is likely to take a big bite of that pay rise.

According to the ECA report, the surge in prices of oil, food and lodgings will 'counter-balance' the projected big pay rise 'considerably'. With Singapore workers looking forward to some of the biggest pay rise in the developed economies, real take-home increases will be 'relatively subdued'. Most other developed economies in the ECA survey are showing forecast wage increases of approximately 4 per cent.

'This latest upswing in inflation, which has caught many people by surprise, will have an impact on real salary increases in 2008,' said the firm's general manager. Employees in Singapore are likely to experience relatively subdued real income rises and employers may have to budget for higher salary increases next year to make up for this year's relatively low increase in real incomes.

If compensation practitioners are considering an upward revision in their forecast salary increases to retain talented employees, they should instead consider the merits of merit pay. Are merit pay increases simply employees’ entitlement based on cost of living adjustment (COLA), or are merit pay increases really based on merit?

According to the Business Times report dated 10 January 2008, Singapore’s inflation rate could soar past 6 per cent in the current quarter, beating previous estimates, as an upward revision of the value of public housing kicks in this month and food and oil prices continue to climb. If employees perceived merit pay increases as entitlement for COLA, there may be an reduction in their real take-home pay.

The concept of merit pay has been around for some time. Evans (1970) believed that merit pay has its origins in the sixteenth and seventeenth centuries with the Protestant Reformation. The protestant work ethic, which views man as competitive and individually oriented, emerged from the belief that economic success was evidence that a person who worked hard was serving God; material success was equated with spiritual purity. Thus, according to Evans (1970), performance-based pay plans continue this theme by rewarding those who have worked the hardest and contributed the most.

It appears logical to base merit pay upon performance, or is it? Commentators say that merit pay plans based upon performance can have many defects, including improper design and implementation; difficulties in paying for individual performance; lack of conviction on the part of employees that pay is really linked to performance; inadequate or inappropriate objectives, criteria, and measures; as well as other shortcomings.

Merit pay continues to be a popular vehicle for rewarding employees. However, merit pay systems that are poorly designed and implemented can lead to perceptions of inequity for individuals; and these perceptions of inequity held by individuals can have a negative impact on important organizational outcomes.

Voluntary turnover is one possible response to merit pay inequity. Those who quit in response to perceived merit pay inequity are typically an organization’s better performers. The average and below-average performers are typically “not bothered” by a merit pay system that pays them the same as their harder-working coworkers.

Another possible response to merit pay inequity is that high-performing employees who receive the same merit pay as lower-performing employees may choose to stay on the job, but they may decide to lower their performance or reduce the quality of their work in the future in an attempt to restore equity.

Regardless of the methods employees adopt to restore their perception of fairness and equity, there is a need for practitioners to know if such behaviors are harmless or may create serious consequences for organizations. Talented employees, especially if they are working in (overseas) Chinese work communities, may simply choose to quit and seek their fortune elsewhere.

In administering merit pay increases, we are forced ranked and fitted into merit pay matrices representing normal distribution curves. This forced-fitting ensures that our pay increase budgets are on target. On occasions, we may "rob Peter to pay Paul" to balance the pay "bucket".

In addition, the spread in pay increase percentages between high performing employees and average employees are usually insignificant and/or inadequate to drive change in behaviors toward increased work performance.

What if a merit pay increase budget contains both cost of living adjustments and work performance outcomes? Where the quantum of merit pay increase lags inflation, as it appear to be the current situation, can we seriously talk about merit pay increase aligned to work-related performance?

Is there really merit in merit pay increase?