Evidence-Based HR
This vignette talks about open-book management. This is a technique that involves disclosing
financial information to employees and teaching them basic finance principles in order to
involve them in cost-saving and revenue-generating decisions and idea creation. The evidence
presented in the case seems to support the potential success of such programs. There are a
couple of potential fears and drawbacks – for example, that financial information could end up
in the hands of competitors.
Exercise
Have students research and find a companies that uses open-books management and have them
compare the performance and cost structure of that firm with a competitor who does not use this
same style of management. Have them discuss the potential benefits of this style of management
– not just in terms of financial performance, but from a motivational and human resource
management point of view.
2. Ownership also encourages employees to focus on the success of the
organization as a whole, but, like profit sharing, may not result in
motivation for high individual performance. Employees may not realize
gain until they sell their stock, often when they are leaving.
Reinforcement theory standpoint is that performance motivation may be
especially low.
a. One method to achieve employee ownership is through stock
options, which gives employees the opportunity to buy the
company’s stock at a previously fixed price. For example, if a
share is offered to employees at $10 a share in 2012, and the stock
price reaches $30 per share in 2017, they have the option to
“exercise his or her options” and sell the stock at a profit. Stock
options are typically reserved for executives, although more
companies have offered options to all employees, such as
Pepsi-Cola, Merck, McDonald’s, Wal-Mart, and Proctor &
Gamble. Some studies suggest that higher organization
performance occurs when top and midlevel managers are eligible
for long-term incentives, although results are not clear regarding
lower-level employees.
3. Employee stock ownership plans (ESOPs) are employee ownership
plans that give employers certain tax and financial advantages when stock
is granted to employees. The number of employees in such plans
increased from 4 million in 1980 to over 10 million in 1999.
a. On the negative side, ESOPs can carry significant risk for
employees. ESOPs must, by law, invest at least 51 percent of their
assets in the company’s stock. This results in less diversification
and more risk, so if the company does not do well and pensions are
funded by an ESOP, employees risk significant loss.
b. ESOPs can be attractive to organizations since they have tax and
financing advantages and can serve as a takeover defense (under
the assumption that employee owners will be “friendly” to
management).
c. Some degree of participation in a select number of decisions is
mandatory, but overall participation in decision making appears to
vary significantly across organizations with ESOPs. Some studies
that the positive effects of ownership are larger in cases where
employees have greater participation.
A. Gainsharing, Group Incentives, and Team Awards
1. Gainsharing programs are based on group or plant performance (rather than
organization wide profits) that does not become part of the employee’s base
salary. One type of gainsharing, the Scanlon plan, provides a monetary bonus
to employees (and the organization) if the ratio of labor costs to the sales
value of production is kept below a certain standard.
2. Table 12.10 shows a modified (i.e., costs in addition to labor are included)
Scanlon plan. Because actual costs ($850,000) were less than allowable costs
($907,500) in the first and second periods, there is a gain of $57,500. The
organization receives 45 percent of the savings, and the employees receive the
other 55 percent, although part of the employees’ share is set aside in the event
that actual costs exceed the standard in upcoming months.
3. Conditions that should be in place for gainsharing to be effective include:
a. management commitment
b. the need to change or a strong commitment to continuous
improvement
c. management’s acceptance and encouragement of employee input
d. high levels of cooperation and interaction
e. employment security
f. information sharing on productivity and costs
g. goal setting
h. commitment of all involved parties to the process of change and
improvement
i. agreement on a performance standard and calculation that is
understandable, seen as fair, and closely related to managerial
objectives.
4. Group incentives and team awards typically pertain to a smaller work
group. Group incentives tend to measure performance in terms of physical
output, whereas team award plans may use a broader range of performance
measures. Drawbacks are that individual competition may be replaced by
competition between teams. In addition, dimensions must be perceived as
fair by employees, and these standards must not exclude important
dimensions such as quality.
B. Balanced Scorecard—Some companies find it useful to design a mix of pay
programs. Relying exclusively on merit pay or individual incentives may result in
high levels of work motivation but unacceptable levels of individualistic and
competitive behavior and too little concern for broader plant or organization
goals. Relying too heavily on profit sharing and gainsharing plans may increase
cooperation and concern for the welfare of the entire plant or organization, but it
may reduce individual work motivation to unacceptable levels. Table 12.11
shows how a mix of measures might be used be a manufacturing form to motivate
improvements in a balanced set of key business drivers.
I. Managerial and Executive Pay—Because of their significant ability to influence
organization performance, top managers and executives are a strategically important
group whose compensation warrants special attention. One concern appears to be that in
some companies, rewards for executives are high regardless of organizational
performance.
A. Executive pay can be linked to organizational performance (from an agency
theory perspective) by making some portion of executive pay contingent on
company profitability or stock performance. This may mean less emphasis on
non-contingent pay and more emphasis on outcome-oriented contracts, both
short-term and long-term.
B. Organizations vary a great deal in the extent to which they use both short-term
and long-term incentive programs. Greater reliance on short-term bonuses and
long-term incentives (relative to base pay) resulted in substantial improvements in
return on assets (Table 12.12).
C. There has been increased pressure from regulators and shareholders to better link
pay and performance. The Securities and Exchange Commission (SEC) requires
companies to report compensation level for the five highest paid executives and
the company’s performance relative to that of competitors over a five-year period.
In 2006, the SEC put additional rules into effect that require better disclosure of
the value of executive perquisites and retirement benefits.
II. Process and Context Issues—Consider employee participation in decision making and its
potential consequences.
A. Involvement in the design and implementation of pay policies has been linked to
higher pay satisfaction and job satisfaction. Agency theory suggests that
employees may set goals in their own favor; however, monitoring would be less
costly and more effective since employees know their workplace best.
Integrity in Action:
Making Sure Executives Get Paid Only for Real Performance: The Role of Clawbacks
This case discusses the new role of “clawback” provisions – future recovery of past
compensation payouts made to an executive who is later found to have violated ethics rules or to
have otherwise behaved inappropriately – in bolstering the image of US drug makers to
constituency groups like institutional investors.
Discussion Question
1. To what degree do you think clawbacks will make detrimental executive behaviors less
likely?
2. Are there other ways to achieve the same objective?
Again, responses may vary here. One issue to bring up is the notion of balanced
Competing Through Globalization:
Capping Executive Bonuses in Europe: Is it a Good Idea?
This vignette describes a move in the European Union to cap the bonuses of bankers to one times
their annual salary. The reason for this is to prevent the risk taking behavior that recently
resulted in EU governments having to bail out banks, leaving taxpayers holding the bill. The
fear involved with this move is that EU bankers will leave EU-domiciled banks. One way to
alleviate the fear is to increase base salary, which carries its own problem – increased fixed costs
for the banks. A model to limit executive compensation from Switzerland is also described. This
model is stricter than rules in the US and is believed to be set to send a signal of an anti-business
climate in Switzerland.
Discussion Question
1. What are the potential costs and benefits of the bonus cap to Swiss companies,
employees, and society?
B. Communication is critical since change in any part of the compensation system is
C. Pay and Process: Intertwined Effects—It is suggested that changing the way
III. Organization Strategy and Compensation Strategy: A Question of Fit— In choosing a pay
strategy, one must consider how effectively it will further the organization’s overall
business strategy. Table 12.15 suggests some matches of strategies.
A Look Back
In this chapter we discussed the potential advantages and disadvantages of different types
of incentive or pay for performance plans. We also saw that these pay plans can have
both intended and unintended consequences. Designing a pay for performance strategy
typically seeks to balance the pros and cons of different plans to reduce the chance of
unintended consequences. To an important degree, pay strategy depends on the particular
goals and strategy of the organization and its units.
Questions
1. Does money motivate? Use the theories and examples discussed in this chapter to
address this question.
According to the Reinforcement Theory, money is a motivator. It states that “a response
The Expectancy Theory states that monetary rewards increase motivation and
2. Think of a job that you have held. Design an incentive plan. What would be the
potential advantages and disadvantages of your plan? If your money was invested in the
company, would you adopt the plan?
Students answers will vary. Look for evidence that students understand how incentive
Chapter Vocabulary
These terms are defined in the “Extended Chapter Outline” section.
Expectancy theory
Principal
Agents
Merit bonus
Merit increase grid
Profit sharing
Stock options
Employee stock ownership plans (ESOPs)
Gainsharing
Discussion Questions
1. To compete more effectively, your organization is considering a profit sharing plan to
increase employee effort and to encourage employees to think like owners. What are the
potential advantages and disadvantages of such a plan? Would the profit sharing plan
have the same impact on all types of employees? Is the size of your organization an
important consideration? Why? What alternative pay programs should be considered?
The advantages are that employees will be more inclined to think like owners and will
The plan would not have the same impact on all employees. Of particular concern would
Size of an organization should not be an important consideration because profit-sharing is
2. Gainsharing plans have often been used in manufacturing settings, but can also be
applied in service organizations. How could performance standards be
developed for gainsharing plans in hospitals, banks, insurance companies, and so forth?
Performance standards should be developed with the help and teamwork of managers and
employees. These standards must be perceived as fair, reasonable, and equitable. Costs
3. Your organization has two business units. One unit is a long-established manufacturer
of a product that competes on price and has not been subject to many technological
innovations. The other business unit is just being started. It has no products yet, but it is
working on developing a new technology for testing the effects of drugs on people via
simulation instead of through lengthy clinical trials. Would you recommend that the two
business units have the same pay programs for recognizing individual contributions?
Why?
No, the plan should not be the same, since the business and risk are very different.
Incentives for the new organization might include stock options, since salaries and
4. Beginning with the opening vignette and continuing throughout the chapter, we have seen
many examples of companies (e.g., General Motors, Citigroup, Walmart) making changes
to how they pay for performance. Do you believe the changes at these companies make
sense? What are the potential payoffs and pitfalls of their new pay strategies?
Self-Assessment Exercise
Refer to the text for the self-assessment exercise.
Exercising Strategy:
Saving the Twinkie: Bankruptcy for Investors, But Bonuses for Executives?
Hostess’s pay decisions, enacted pre-bankruptcy liquidation, are being reviewed by their
bankruptcy judge. While this is not an uncommon practice, cried of foul play from creditors,
employees and other stakeholders applied enough pressure to have the decisions looked at and
eventually rolled back. The vignette describes several instances of these types of practices which
are defended as being necessary to give executives incentives to stick around through a
bankruptcy.
Questions
1. What happens to investors during a bankruptcy like this one?
This is a question that has no real happy answer. Students should recognize that investors
2. Do you believe the executives in this case should receive bonuses? Why or why not?
A yes or no answer can both be defended here. Yes they should – the company needs to