Page 121 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 107

No wonder the pay-delivery system is failing. Those responsible for training and develop-
ment have not kept up with pay program designs. The latter are usually more sophisticated
than the ability of the users, due to inadequate training.

Importance of Effort. As stated earlier, the classic performance model indicates that effort
times ability will equal outcome, or performance. Thus, a lower value in one can be offset by
a higher value in the other. For example, a person with average ability could become very
successful by expending great amounts of effort. The amount of effort expended is a function
of the desirability of the outcome and the capacity for effort.
This is illustrated in Figure 4-3. In this example, the two curves are straight lines; how-
ever, either or both could be curves of varying slopes dependent upon the structure of the
reward system and the nature of the work. With some combinations, there is an increasing
efficiency; with others, efficiency decreases; and still others create a combination, or S curve.
In this model, the executive receives a decreasing rate of return on effort (although the vari-
ance is positive) up to point A. After that point, although the individual continues to receive
more pay, the return for effort is not equitable. Thus, if there were competing opportunities,
the individual would probably shift to those after point A. This shift can be offset if the
organization increases the slope of the pay line and moves the intersection point farther to
the right.

$ Output
(Performance)
Performance

A

Pay
Pay

Performance

Effort
Figure 4-3. Effort—and its impact on performance

Obviously, it is much easier to demonstrate this type of relationship clinically with a set
of curves than for the executive to quantify it personally. However, although the measure-
ments may not be as precise, they nonetheless are made and are used as the basis for altering
behavior.

Achievement vs. Pay. While the objective of a sound compensation program is to pay
correctly in relation to performance, there are repeated examples of pay not being in concert
with achievement—even for those companies that strive diligently to administer in an