PART 5

HUMAN RESOURCE INTERVENTIONS

Chapter 15 | Performance Management
Chapter 16 | Talent Management
Chapter 17 | Workforce Diversity and Wellness

This is the first of three chapters devoted to human resources management interventions, including performance management, talent
management, and diversity and wellness.

It specifically addresses performance management, or how goal setting, performance appraisal, training and development, and reward
systems can be used to manage individual and group performance.
(How training and development can support performance management is discussed in Chapter 16.)

This chapter also describes how to align performance management systems with business strategy, employee involvement, and
workplace technology.

Goal setting describes the interaction between managers and employees in jointly defining member work behaviors and outcomes.
Orienting employees to the appropriate kinds of work outcomes can reinforce the work designs described in Chapter 14 and support
the organization’s strategic objectives.

Goal setting can clarify the duties and responsibilities associated with a particular job or work group.

 When applied to jobs, goal setting can focus on individual goals and can reinforce individual contributions and work
outcomes.

 When applied to work groups, it can be directed at group objectives and can reinforce members’ joint actions and
overall group outcomes. One popular and classic approach to goal setting is called management by objectives.

The performance appraisal process involves collecting and feeding back data about individual or group performance and the way
results were achieved.

 It is a systematic process that jointly assesses work-related achievements, strengths, and weaknesses. The purpose of this
process is to improve work outcomes in the near term and over time.

 It also can facilitate career counseling, provide information about the strength and diversity of human resources in the
company, and link employee performance with rewards.

 In worldwide organizations, the appraisal process must be sensitive to different cultural assumptions regarding openness,
transparency, and relationships to authority.

Reward systems are concerned with eliciting and reinforcing desired behaviors and work outcomes through compensation and other
forms of recognition.

They can support goal setting and appraisal systems by acknowledging the kinds of behaviors required to implement a particular
work design or support a business strategy.

Like goal setting, rewards systems can be oriented to individual jobs and goals or to group functions and objectives. Moreover, they
can be tailored to support traditional work designs as well as enriched, self-regulating designs. Developing innovative reward
systems is an active area of change in many organizations today.

Performance management interventions traditionally are implemented by the human resources department within organizations,
whose managers have special training in these areas. Because of the breadth and depth of knowledge required to carry out these kinds
of change programs successfully, practitioners tend to specialize in one part of the human resources function, such as
performance appraisal or compensation. Increasingly, however, the effectiveness of these interventions and processes rely on
strong collaboration with line managers.

The interest in integrating human resources management with organization development (OD) continues unabated. OD practitioners
involved in organization design and employee involvement interventions have realized the need to bring human resources
practices more in line with the new designs and processes. Consequently, human resource specialists now frequently help initiate
OD projects.
For example, a large electronics firm expanded the role of compensation specialists to include initiation of work design projects. The
compensation people at this firm, who traditionally were consulted by OD practitioners after the work design had taken place, were
dissatisfied with this secondary role and wanted to be more proactive. In most cases, human resource practitioners continue to
specialize in their respective areas, but they become more sensitive to and competent in organization development. Similarly, OD
practitioners continue to focus on planned change while becoming more knowledgeable about human resources management.

We begin by describing a performance management model.

 It shows how goal setting, performance appraisal, training and development, and rewards are closely linked and
difficult to separate in practice, but how each element is distinct and has its own dynamics.
 Following the model, goal setting, performance appraisal, and reward system interventions are discussed and
their impact on organization effectiveness evaluated.

I. A MODEL OF PERFORMANCE MANAGEMENT

Performance management is an integrated process of defining, assessing, developing, and reinforcing employee work behaviors and
outcomes.
Organizations with a well developed performance management process often outperform those without this element of organization
design.

As shown in Figure 15.1, performance management includes practices and methods for goal setting, performance appraisal,
training and development, and reward systems.

These practices jointly influence the performance of individuals and work groups.

 Goal setting specifies the kinds of performances that are desired;

 performance appraisal assesses those outcomes;

 training and development systems build individual competencies; and

 reward systems provide the reinforcement to ensure that desired outcomes are repeated.

 Because performance management occurs in a larger organizational context, at least three contextual factors determine
how these practices affect work performance: business strategy, workplace technology, and employee involvement.
 High levels of work performance tend to occur when goal setting, performance appraisal, training and development, and
reward systems are aligned jointly with these contextual factors.
Business strategy defines the goals and objectives, policies, and intended relationships between the organization and its environment
to achieve effectiveness. Whether the organization is for-profit, nonprofit, or operates on a worldwide basis, the business strategy must
account for the extent to which its activities have to be tailored to a local situation.

Performance management focuses, assesses, develops, and reinforces member work behaviors toward those objectives and
intentions. This ensures that work behaviors, both locally and globally, are strategically driven.

Workplace technology affects whether performance management practices should be based on the individual or the group.
 When the work processes are low in interdependence and work is designed for individual jobs, goal setting, performance
appraisal, development, and reward systems should be aimed at individual work behaviors.

 Conversely, when work is highly interdependent and work is designed for groups, performance management should be aimed
at group behaviors.

Finally, the level of employee involvement in an organization should determine the nature of performance management practices.

 When organizations are highly bureaucratic,:

o with low levels of participation, then goal setting, performance appraisal, development, and reward systems should
be formalized and administered by management and staff personnel.

o In high-involvement situations, on the other hand, performance management should be heavily participative, with
both managers and employees setting goals, determining appropriate development programs, and appraising and
rewarding performance. In high-involvement organizations, for example, employees participate in all stages of
performance management, and are heavily involved in both designing and administering its practices.

II. INTERVENTIONS

1. GOAL SETTING
Goal setting involves managers and subordinates in jointly establishing and clarifying employee goals.
In some cases, such as management by objectives, it also can facilitate employee counseling and support.
In other cases, such as the balanced scorecard, it generates goals in several defined categories, at different organizational levels, to
establish clear linkages with business strategy.
The process of establishing challenging goals involves managing the level of participation and goal difficulty. Once goals have been
established, the way they are measured is an important determinant of member performance.

Goal setting can affect performance in several ways:

 It influences what people think and do by focusing their behavior in the direction of the goals, rather than elsewhere.
 Goals can energize behavior, motivating people to put forth the effort to reach difficult goals that are accepted, and when
goals are difficult but achievable, goal setting prompts persistence over time.

o Goal-setting processes and interventions to improve them are common and have been implemented in most
organizations.

a. Characteristics of Goal Setting

Establishing Challenging Goals The first element of goal setting concerns establishing goals that are perceived as
challenging but realistic and to which there is a high level of commitment.
Clarifying Goal Measurement The second element in the goal-setting process involves specifying and clarifying the goals.
When given specific goals, workers perform higher than when they are simply told to “do their best” or when they receive no
guidance at all. Specific goals reduce ambiguity about expectations and focus the search for appropriate behaviors.

b. Application Stages

Based on these features of the goal-setting process, OD practitioners have developed specific approaches to goal setting. The
following steps characterize those applications:

1. Diagnosis. The first step is a thorough diagnosis of the job or work group, of employee needs, and of the three context factors,
business strategy, workplace technology, and level of employee involvement. This provides information about the nature and
difficulty of specific goals, the appropriate types and levels of participation, and the necessary support systems.

2. Preparation for goal setting. This step prepares managers and employees to engage in goal setting, typically by increasing
interaction and communication between managers and employees, and offering formal training in goal-setting methods. Specific
action plans for implementing the program also are made at this time.
3. Setting of goals. In this step, challenging goals are established and methods for goal measurement are clarified. Employees
participate in the process to the extent that contextual factors support such involvement and to the extent that they are likely to set
higher goals than those assigned by management.

4. Review. At this final step, the goal-setting process is assessed so that modifications can be made, if necessary. The goal attributes
are evaluated to see whether the goals
are energizing and challenging and whether they support the business strategy and
can be influenced by the employees.

c. Management by Objectives (MBO)

A common form of goal setting used in organizations is management by objectives (MBO). This method is chiefly an attempt to align
personal goals with business strategy by increasing communications and shared perceptions between the manager and subordinates,
either individually or as a group, and by reconciling conflict where it exists.

There are five basic steps in implementing an MBO process.

1. Work group involvement. In the first step of MBO, the members of the primary work group define overall group and individual
goals and establish action plans for achieving them. If this step is omitted or if organizational goals and strategies are unclear, the
effectiveness of an MBO approach may be greatly reduced over time.

2. Joint manager–subordinate goal setting. Once the work group’s overall goals and responsibilities have been determined,
attention is given to the job duties and responsibilities of individuals. Roles are carefully examined in light of their interdependence
with the roles of others outside the work group.

3. Establishment of action plans for goals. The subordinate develops action plans for goal accomplishment, either in a group
meeting or in a meeting with the immediate manager. The action plans reflect the individual style of the subordinate, not that of the
supervisor.

4. Establishment of criteria, or yardsticks, of success. At this point, the manager and subordinate agree on the success criteria for
the goals that have been established—criteria that are not limited to easily measurable or quantifiable data. A more important reason
for jointly developing the success criteria is to ensure that the manager and subordinate have a common understanding of the task and
what is expected of the subordinate. Frequently, the parties involved discover that they have not reached a mutual understanding. The
subordinate and the manager may have agreed on a certain task, but in discussing how to measure its success, they find that they have
not been communicating clearly. Arriving at a joint understanding and agreement on success criteria is the most important step in the
entire MBO process.

5. Review and recycle. Periodically, the manager reviews work progress, either in thelarger group or with the subordinate. There are
three stages in this review process.

d. Effects of Goal Setting and MBO

The impact of goal setting has been researched extensively and shown to be a particularly effective OD intervention and a key part of
an overall performance management process.

For example, a study by the Center for Effective Organizations at USC showed a strong correlation between perceptions of
performance management effectiveness and goals that are jointly set by managers and workers and when those goals are tied to
strategy. The research results on MBO generally are positive but less consistent than are the findings on goal setting.

Goal setting appears to produce positive results over a wide range of jobs and organizations.

2. PERFORMANCE APPRAISAL
Table 15.1 summarizes several common elements of performance appraisal systems.For each element, two contrasting features are
presented, representing traditional bureaucratic approaches and newer, high-involvement approaches.
Performance appraisals are conducted for a variety of purposes, including affirmative action, pay and promotion decisions, and
human resources planning and development. Because each purpose defines what performances are relevant and how they should be
measured, separate appraisal systems are often used.
For example, appraisal methods for pay purposes are often different from systems that assess employee development or
promotability.

Employees also have a variety of reasons for wanting appraisal, such as receiving feedback for career decisions, getting a raise, and
being promoted. Rather than trying to meet these multiple purposes with a few standard appraisal systems, the new appraisal
approaches are more tailored to balance the multiple organizational and employee needs. This is accomplished by actively involving
the appraisee, coworkers, and managers in assessing the purposes of the appraisal at the time it takes place and adjusting the
process to fit that purpose. Thus, at one time the appraisal process might focus on pay decisions, another time on employee
development, and still another time on employee promotability. Actively involving all relevant participants can increase the chances
that the purpose of the appraisal will be correctly identified and understood and that the appropriate appraisal methods will be applied.

 The new methods tend to expand the appraiser role beyond managers to include multiple raters, such as the appraisee, peers
or coworkers, and direct reports and others having direct exposure to the manager’s or employee’s performance. Also known
as 360-degree feedback, this broader approach is used more for member development than for compensation purposes.3
This wider involvement provides a number of different views of the appraisee’s performance. It can lead to a more
comprehensive assessment of the employee’s performance and can increase the likelihood that both organizational and
personal needs will be taken into account. The key task is to form an overarching view of the employee’s performance that
incorporates all of the different appraisals. Thus, the process of working out differences and arriving at an overall assessment
is an important aspect of the appraisal process. This improves the appraisal’s acceptance, the accuracy of the information, and
its focus on activities that are critical to the business strategy.

 The newer methods also expand the role of the appraisee. Traditionally, the employee is simply a receiver of feedback. The
supervisor unilaterally completes a form concerning performance on predetermined dimensions, usually personality traits,
such as initiative or concern for quality, and presents its contents to the appraisee. The newer approaches actively involve
appraisees in all phases of the appraisal process. The appraise joins with superiors and staff personnel in gathering data
on performance and identifying training needs. This active involvement increases the likelihood that the content of the
performance appraisal will include the employee’s views, needs, and criteria, along with those of the organization. This
newer role for employees increases their acceptance and understanding of the feedback process.

 Performance measurement is typically the source of many problems in appraisal because it is seen as subjective.

Traditionally, performance evaluation focused on the consistent use of prespecified traits or behaviors. To improve
consistency and validity of measurement, considerable training is used to help raters (supervisors) make valid assessments.
This concern for validity stems largely from legal tests of performance appraisal systems and leads organizations to develop
measurement approaches, such as the behaviorally anchored rating scale (BARS) and its variants. In newer approaches,
validity is not only a legal or methodological issue but a social issue as well; all appropriate participants are involved
in negotiating acceptable ways of measuring and assessing performance. Increased participation in goal setting is a part
of this new approach. All participants are trained in methods of measuring and assessing performance. Because it focuses on
both objective and subjective measures of performance, the appraisal process is more understood, accepted, and accurate.

The timing of performance appraisals traditionally are fixed by managers or staff personnel and is based on
administrative criteria, such as yearly pay decisions. Newer approaches increase the frequency of feedback. In 1997, 78%
of appraisals were performed annually; in 2003, over 40% of companies surveyed conducted appraisals two times per
year.Another study found that 63% of high growth companies reviewed performance more than once per year versus 22% of
the low-growth companies.
Although it may not be practical to increase the number of formal appraisals, the frequency of informal feedback can
increase, especially when strategic objectives change or when the technology is highly uncertain. In those situations,
frequent performance feedback is necessary for appropriate adaptations in work behavior. The newer approaches to appraisal
increase the timeliness of feedback and give employees more control over their work.
a. Application Stages

The process of designing and implementing a performance appraisal system has received increasing attention. OD practitioners have
recommended the following six steps:
1. Select the right people. For political and legal reasons, the design process needs to include human resources staff, legal
representatives, senior management, and system users. Failure to recognize performance appraisal as part of a complex performance
management system is the single most important reason for design problems. Members representing a variety of functions need to be
involved in the design process so that the essential strategic and organizational issues are addressed.

2. Diagnose the current situation. A clear picture of the current appraisal process is essential to designing a new one. Diagnosis
involves assessing the contextual factors (business strategy, workplace technology, and employee involvement), current appraisal
practices and satisfaction with them, work design, and the current goal setting and reward system practices. This information is used to
define the current system’s strengths and weaknesses.

3. Establish the system’s purposes and objectives. The ultimate purpose of an appraisal system is to help the organization achieve
better performance. Managers, staff, and employees can have more specific views about how the appraisal process can be used.
Potential purposes can include serving as a basis for rewards, career planning, human resources planning, and performance
improvement or simply giving performance feedback.

4. Design the performance appraisal system. Given the agreed-upon purposes of the system and the contextual factors, the
appropriate elements of an appraisal system can be established. These should include choices about who performs the appraisal, who
is involved in determining performance, how performance is measured, and how often feedback is given. Criteria for designing an
effective performance appraisal system include timeliness, accuracy, acceptance, understanding, focus on critical control points, and
economic feasibility.

5. Experiment with implementation. The complexity and potential problems associated with performance appraisal processes
strongly suggest using a pilot test of the new process to spot, gauge, and correct any flaws in the design before it is implemented
systemwide.

6. Evaluate and monitor the system. Although the experimentation step may have uncovered many initial design flaws, ongoing
evaluation of the system once it is implemented is important. User satisfaction from human resources staff, manager, and employee
viewpoints is an essential input. In addition, the legal defensibility of the system should be tracked by noting the distribution of
appraisal scores against age, sex, and ethnic categories.

b. Effects of Performance Appraisal

 Despite the poor track record organizations have in implementing appraisal processes well, the research supports the linkage
between feedback and performance.Early studies concluded that objective feedback as a means for improving individual and
group performance has been “impressively effective” and has been supported by a large number of literature reviews over the
years.
 Another researcher concluded that “objective feedback does not usually work, it virtually always works.”In field studies
where performance feedback contained behavior-specific information, median performance improvements were over 47%;
when the feedback concerned less-specific information, median performance improvements were over 33%.
 In a meta-analysis of performance appraisal interventions, feedback was found to have a consistently positive effect across
studies.
 In addition, although most appraisal research has focused on the relationship between performance and individuals, several
studies have demonstrated a positive relationship between group performance and feedback.

3. REWARD SYSTEMS
 Organizational rewards are powerful incentives for improving employee and work group performance.
 As pointed out in Chapter 13, rewards also can produce high levels of employee satisfaction.
 OD traditionally has relied on intrinsic (basic) rewards, such as enriched jobs and opportunities for decision making, to
motivate employee performance.
 Early quality-of-work-life interventions were based mainly on the intrinsic satisfaction derived from performing
challenging, meaningful types of work.
 More recently, OD practitioners have expanded their focus to include extrinsic rewards: base pay, stock options, bonuses,
gain sharing, promotions, and benefits. They have discovered that both intrinsic and extrinsic rewards can enhance
performance and satisfaction.

a. Structural and Motivational Features of Reward Systems

A reward system is an important part of an organization’s design and must be aligned with the strategy, structure, employee
involvement, and work. The design features of a reward system are summarized in Table 15.2.
• Person/job based versus performance based.
 The most prevalent system is the job-based system. Here, job descriptions are created for each position in the organization
and a value is attached to the work performed.

 Pay is based on that valuation process. More recently, organizations challenged to be more agile and adaptable, such as
Netflix and Nike, have crafted their reward systems around the person in the job and the value brought by their skills and
knowledge. Skill-based pay and knowledge-based pay are important examples of this system. The other major alternative is
to base rewards on the performance achieved by a job or person. In this system, pay is contingent on the outcomes produced.

• Individual versus group rewards. The interdependency among work tasks is another important reward system contingency. When
work is complex and the performance of one task depends on prior tasks, the appropriate work design is team based because
successfully adding value requires tight coordination. This tight coordination is reinforced by reward systems that recognize group
level outputs. When work tasks are independent, individual reward systems incent individual behavior.

• Internal and external equity. Member satisfaction and motivation can be influenced by design features that ensure that the
organization’s pay policies are equitable or fair.
 Internal equity concerns comparison of individual rewards to those holding similar jobs or performing similarly in
the organization. Internal inequities typically occur when employees are paid a similar salary or hourly wage regardless of
their position or level of performance. Many organizations work hard to establish practices to ensure that people who are
doing similar kinds of activities have similar levels of compensation. Internal equity is often a challenge in worldwide
organizations where cost-of-living and a country’s level of economic development can imply different pay levels for the
same work.

 External equity involves comparing the organization’s rewards with those of other organizations in the same labor market.
Most human resources policies commit to a rewards and compensation system relative to the market. Organizations can
decide to pay below, at, or above market rates. In their quest for attracting and retaining scarce human resource talent, many
organizations have had to commit to above-market pay schemes. When an organization’s reward level does not compare
favorably with the level of other organizations, employees are likely to feel inequitably rewarded and may leave.

• Hierarchy. Although not often a formal policy, many organizations offer different types of rewards based on a position’s level in the
organization structure. The recent concerns over CEO pay reflect the increasing prevalence of hierarchical reward systems.In
hierarchical systems, senior managers have access to a variety of perquisites, such as corporate transportation, expense accounts,
financial aid, or health benefits that others do not.

• Rewards mix. This design feature involves specifying the extent to which different types of rewards are included in the overall
reward strategy. These rewards can include pay in various forms, including base salary, bonuses, commissions, and stock; benefits,
such as health care, insurance, child care, leaves, and education; and perquisites, including preferred office space, cell phones, cars, or
health club memberships.

Recent changes in the laws governing the expensing of stock options are changing the way stock is viewed as part of the rewards mix.
In addition, although pay receives most of the attention in reward systems, the contribution of other rewards, such as benefit programs
and status incentives, should not be underestimated.

For example, rising health care costs and increasing interest in retaining important skills and competencies have resulted in a variety
of benefit innovations to increase the value of this reward.

• Security. Organizations, such as IBM and AT&T, were once associated with the benefits of lifetime employment for organization
members. Today, the rapid expansion and contraction of markets and the realities of downsizing have dramatically altered the
psychological employment contract. Instead of job security, a more instrumental relationship has emerged. However, organizations
can and do make commitments to people and job security and this remains an important feature of reward systems.

• Seniority. Many reward systems include an implicit or explicit policy concerning the value of longevity. Organizations, especially
unionized companies covered by a collective bargaining agreement, often have built-in rewards for increasing lengths of service.

b. Reward System Design Features

Based on value expectancy theory, the ability of rewards to motivate desired behavior depends on these five factors:
1. Availability. For rewards to reinforce desired performance, they must be not only desired but also available. Too little of a
desired reward is no reward at all. For example, pay increases are often highly desired but unavailable. Moreover, pay
increases that are below minimally accepted standards may actually produce negative consequences.
2. Timeliness. Like effective performance feedback, rewards should be given in a timely manner. A reward’s motivating
potential is reduced to the extent that it is separated in time from the performance it is intended to reinforce.

3. Performance contingency. Rewards should be closely linked with particular performances.

If the goal is met, the reward is given; if the target is missed, the reward is reduced or not given. The clearer the linkage
between performance and rewards, the better able rewards are to motivate desired behavior. Unfortunately, this criterion
often is neglected in practice. Many, if not most, employees nationwide believe that there is no linkage between pay and
performance.50 If salary increases are concentrated at certain levels, almost everyone, regardless of performance level, is
getting about the same raise.

4. Durability. Some rewards last longer than others. Intrinsic rewards, such as increased autonomy and pride in
workmanship, tend to last longer than extrinsic rewards. Most people who have received a salary increase realize that it gets
spent rather quickly.

5. Visibility. To leverage a reward system, it must be visible. Organization members must be able to see who is getting the
rewards. Visible rewards, such as placement on a high-status project, promotion to a new job, and increased authority, send
signals to employees that rewards are available, timely, and performance contingent.

c. Skill- and Knowledge-Based Pay Systems

The most traditional reward system is individual and job based. The characteristics of a particular job are determined, and pay is made
comparable to what other organizations pay for jobs with similar characteristics. Pay increases are primarily a function of cos of-living
adjustments (COLA) or small merit pools that are awarded with little relationship to performance. This job evaluation and reward
method tends to result in pay systems with high external and internal equity. However, it fails to reward employees for all of the skills
that they have, discourages people from learning new skills, and results in a view of pay as an entitlement.
Some organizations, such as General Mills, United Technologies, Frito-Lay, Procter and Gamble, and General Foods, have worked to
resolve these problems by designing pay systems according to people’s skills and abilities. A 2006 survey found that almost 24% of
the Fortune 1000 use skill or knowledge-based pay to at least some extent.By focusing on the individual, rather than the job, skill-
based pay systems reward learning and growth.

 Skill-based pay systems must first establish the skills needed for effective operations, identify the optimal skill profile
and number of employees needed with each skill, price each skill and skill set, develop rules to sequence and acquire
skills, and develop methods to measure member skill acquisition. Typically, employees are paid according to the number
of different jobs that they can perform.

For example, in the classic case of General Mill’s Squeeze-It plant new employees were paid a starting wage at the low end
of the skilled worker wage rate for premium employers in the community.

d. Performance-Based Pay Systems

Pay-for-performance plans tend to vary along three dimensions:

(1) the organizational unit by which performance is measured for reward purposes—an individual, group, or
organization basis;
(2) the way performance is measured—the subjective measures used in supervisors’ ratings or objective measures of
productivity, costs, or profits; and
(3) what rewards are given for good performance—salary increases, stock, or cash bonuses.

e. Gain-Sharing Systems
As the name implies, gain sharing involves paying employees a bonus based on improvements in the operating results of an
organization. Although not traditionally associated with employee involvement, gain sharing increasingly has been included in
comprehensive employee involvement projects. Many organizations, such as Harley Davidson, General Dynamics, Gould Electronics,
and Mondragon (Spain) are discovering that when designed correctly, gain-sharing plans can contribute to employee motivation,
involvement, and performance.

Developing a gain-sharing plan requires making choices about the following design elements:
 • Process of design. The success of a gain-sharing system depends on employee acceptance and cooperation. Recommended
is a participative approach that involves a cross section of employees to design the plan and be trained in gain-sharing
concepts and practice. The task force should include people who are credible and represent both management and
nonmanagement interests.

• Organizational unit covered. The size of the unit included in the plan can vary widely, from departments or plants with
less than 50 employees to companies with several thousand people. A plan covering the entire plant would be ideal in
situations where there is a freestanding plant with good performance measures and an employee size of less than 500. When
the number of employees exceeds 500, multiple plans may be installed, each covering a relatively discrete part of the
company.

• Bonus formula. Gain-sharing plans are based on a formula that generates a bonus pool, which is divided among those
covered by the plan. Although most plans are custom-designed, there are two general considerations about the nature of the
bonus formula. First, a standard of performance must be developed that can be used as a baseline for calculating
improvements or losses. Some plans use past performance to form a historical standard, whereas others use engineered or
estimated standards. When available, historical data provide a relatively fair standard of performance; engineer-determined
data can work, however, if there is a high level of trust in the standard and how it is set. Second, the costs included in arriving
at the bonus must be chosen. The key is to focus on those costs that are most controllable by employees. Some plans use
labor costs as a proportion of total sales; others include a wider range of controllable costs, such as those for materials and
utilities.

• Sharing process. Once the bonus formula is determined, it is necessary to decide how to share gains when they are
obtained. This decision includes choices about what percentage of the bonus pool should go to the company and what
percentage to employees. In general, the company should take a percentage low enough to ensure that the plan generates a
realistic bonus for employees. Other decisions about dividing the bonus pool include who will share in the bonus and how the
money will be divided among employees. Typically, all employees included in the organizational unit covered by the plan
share in the bonus. Most plans divide the money on the basis of a straight percentage of total salary payments.

• Frequency of bonus. Most plans calculate a bonus monthly. This typically fits with organizational recording needs and is
frequent enough to spur employee motivation. Longer payout periods generally are used in seasonal businesses or where
there is a long production or billing cycle for a product or service.

• Change management. Organizational changes, such as new technology and product mixes, can disrupt the bonus formula.
Many plans include a steering committee to review the plan and to make necessary adjustments, especially in light of
significant organizational changes.

• The participative system. Many gain-sharing plans include a participative system that helps to gather, assess, and
implement employee suggestions and improvements.
These systems generally include a procedure for formalizing suggestions and different levels of committees for assessing and
implementing them.

f. Promotion Systems

Like decisions about pay increases, many decisions about promotions and job movements in organizations are made in a top-down,
closed manner: Higher-level managers decide whether lower-level employees will be promoted. This process can be secretive, with
people often not knowing that a position is open, that they are being considered for promotion, or the reasons why some people are
promoted but others are not. Without such information, capable people who might be interested in a new job may be overlooked.

Furthermore, because employees may fail to see the connection between good performance and promotions, the motivational
potential of promotions is reduced.

Finally, emphasizing promotions as a reward focuses attention on advancement instead of developing new skills and knowledge
and can lead to reduced flexibility in the workforce.
Fortunately, this is changing. Most organizations today have tried to reduce the secrecy surrounding promotions and job changes by
openly posting the availability of new jobs and inviting people to nominate themselves. Although open job posting entails extra
administrative costs, it can lead to better promotion decisions. Open posting increases the pool of available personnel by ensuring that
interested people will be considered for new jobs and that capable people will be identified. Open posting also can increase employee
motivation by showing that a valued reward is available and contingent on performance.

Some organizations have increased the accuracy and equity of job-change decisions by including peers and subordinates in the
decision-making process. Peer and subordinate judgments about a person’s performance and promotability help bring all
relevant data to bear on promotion decisions. Such participation can increase the accuracy of these decisions and can make people
feel that the basis for promotions is equitable. In many self-regulating work teams, for example, the group interviews and helps select
new members and supervisors. This helps ensure that new people will fit in and that the group is committed to making that happen.
Evidence from high-involvement plants suggests that participation in selecting new members can lead to greater group cohesiveness
and task effectiveness.

g. Reward-System Process Issues

Process refers to how pay and other rewards typically are administered in the organization. At least two process issues affect
employees’ perceptions of the reward system: who should be involved in designing and administering the reward system, and
what kind of communication should exist with respect to rewards.