ABSTRACT
In the last chapter, we discussed the role of the manager in hiring and promoting, and some of the ethical issues involved. We turn now to the role of the manager in evaluating the performance of employees and determining their compensation. In a number of employment situations, performance on the job does not determine or even influence raises and bonuses. Under negotiated labor-management contracts, salaries and raises are determined by one’s position and how long one has been in it (seniority).1 Most employment contracts specify raises and bonuses in such a way that managerial performance appraisal does not play a role. Public employee raises are sometimes determined by legislative bodies rather than by managers. Raises and bonuses of various types for CEOs of public companies are determined by boards of directors, on the advice of their compensation committees and often with the input of compensation consultants hired for this purpose. While this group constitutes a small portion of all compensation decisions, it receives a significant amount of publicity and therefore shapes some people’s view of the whole process of appraisal and compensation. Several years ago, the legislature of the State of Nevada determined that faculty members at the state’s universities and community colleges would not receive cost of living raises during the next fiscal period, but that a pool of money would be available for merit raises. This led to considerable discussion at the universities about how to structure merit increases. One faction felt that all faculty members, by the fact that they were employed as faculty members, were meritorious. They called for a distribution of the merit pool to all faculty members. Another faction felt that merit was not universal (at
least, not equal merit) and that there should be differences in the amounts and percentages of raises granted different faculty members, with a significant minority not receiving increases. The legislature got wind of this discussion (or so it was rumored) and sent word to university administrators that if the merit raises were turned into cost of living raises, the legislature would simply withhold all funds for faculty increases. The merit pool was finally treated as such; some faculty members got larger percentage raises than others, and many got no raise at all. This little story illustrates an important point about the connection between performance appraisal and compensation. An organization can choose to award compensation increases based on performance, or based on inflation, or based on position and longevity, or based on some combination of these factors.2 However, these are different bases for making compensation decisions, and the organization needs to be clear about what it is trying to do in order to manage compensation rationally. Managers generally seem to prefer merit systems, whereby at least part of any increase in compensation is based on performance. Some workers, particularly those in union environments, seem to prefer some basis other than merit, so that individual managers will have no say in which workers receive how much increase in their compensation. Since this book is primarily written for managers, I suspect that most readers will take it for granted that merit compensation is the right and natural way to go. But, as I regularly remind my MBA students, the whole world is not made up of people who think that managing is a fine and noble profession, and that it is so complex that an investment of time and money such as they are making is helpful in learning how to do it well. Less than three miles from the university where I teach is the world-famous Las Vegas Strip. There, in huge hotel-casinos, tens of thousands of union workers perform tasks that provide services to millions of visitors annually. Many of these workers have higher pay and benefits than they would otherwise have because of the influence of the Culinary Union. Ask these workers if management is a fine and honorable profession, and many of them will say no. One of the reasons that some workers pay union dues is their perception that they will fare better as employees with a union than without one. Hotel workers in Las Vegas are not the only ones who hesitate to trust their managers to determine their salary increase. Many teachers throughout the United States belong to unions. These unions, almost without exception, have historically been opposed to any form of merit pay.3 Their expressed feeling on the subject is this: if administrators, such as school principals, are allowed to determine salary increases, they will simply reward their friends and punish their enemies. They simply cannot be trusted to evaluate meritorious teaching and make compensation decisions accordingly. Faculty in many American universities receive merit pay increases. However, the evaluation of meritorious performance is numbingly complex.
