CAN INCENTIVES PROMOTE ETHICS? In recent years the federal government has invest

Question

CAN INCENTIVES PROMOTE ETHICS?

In recent years the federal government has investigated allegations that Walmart had engaged in bribery in Mexico, China, and Brazil. Walmart reacted with changes aimed at promoting legal, ethical conduct—efforts that cost hundreds of millions of dollars. It launched an inter- nal investigation and linked a portion of executives’ pay to meeting standards for compliance with legal require- ments. The expectation for the compliance-related incen- tive pay was that if corporate executives are rewarded for the company behaving ethically, they will be more careful to ensure that it does so.

Beginning in 2014, Walmart began to issue a yearly Global Compliance Program Report. Based on the company’s performance that year, the corporate audit committee determined that Walmart had “achieved sub- stantial progress” meeting these objectives, and cor- porate executives received their bonuses without any compliance-related cuts.

But the company didn’t stop there with the impor- tant issue of compliance. CEO Doug McMillon says the company will continue to focus on building a world-class ethics and compliance program to prevent, detect, and remediate issues that arise in Walmart’s growing busi- ness around the world—and set compliance goals and objectives on an annual basis. Some of the objectives itemized in the most recent report for fiscal year 2016 include taking a proactive approach to anti-corruption; elevating the customer experience through food safety and quality; increasing transparency in the company’s global supply chain and revisiting how the company conducts supplier audits; and leveraging the benefits of technology in daily business practices.

Questions

Do you think Walmart’s compliance-related perfor- mance standards, as described here, would ensure ethical conduct? Why or why not?

Review the principles for incentive pay described in the first section of this chapter. How, if at all, could Walmart apply these principles to strengthen its effort to promote compliance with legal and ethical standards?

(In the first section of this chapter)

Incentive Pay

Along with wages and salaries, many organizations offer incentive pay—that is, pay specif- ically designed to energize, direct, or maintain employees’ behavior. Incentive pay is influ- ential because the amount paid is linked to certain predefined behaviors or outcomes. For example, as we will see in this chapter, an organization can pay a salesperson a commission for closing a sale, or the members of a production department can earn a bonus for meeting a monthly production goal. Usually these payments are in addition to wages and salaries. Knowing they can earn extra money for closing sales or meeting departmental goals, the employees often try harder or get more creative than they might without the incentive pay. In addition, the policy of offering higher pay for higher performance can make an organi- zation attractive to high performers when it is trying to recruit and retain these valuable employees.4 For reasons such as these, companies are devoting a growing share of payroll budgets to incentive pay. A recent survey found that 43% of companies paid bonuses or other cash awards to salaried nonexempt workers, and 93% paid them to exempt workers.5

For incentive pay to motivate employees to contribute to the organization’s success, the pay plans must be well designed. In particular, effective plans meet the following requirements:

            Performance measures are linked to the organization’s goals.

            Employees believe they can meet performance standards.

            The organization gives employees the resources they need to meet their goals.

            Employees value the rewards given.

            Employees believe the reward system is fair.

            The pay plan takes it into account that employees might ignore any goals that are not rewarded.

Because incentive pay is linked to particular outcomes or behaviors, the organization is encouraging employees to demonstrate those chosen outcomes and behaviors. As obvious as that may sound, the implications are more complicated. If incentive pay is extremely reward- ing, employees might focus only on the performance measures rewarded under the plan and ignore measures that are not rewarded. Suppose an organi- zation pays managers a bonus when employees are satis- fied; this policy might interfere with other management goals. A manager who doesn’t quite know how to inspire employees to do their best might be tempted to fall back on overly positive performance appraisals, letting work slide to keep everyone happy. Similarly, many call centers pay employees based on how many calls they handle, as an incentive to work quickly and efficiently. However, speedy call handling does not necessarily foster good customer relationships. As we will see in this chapter, organizations may combine a number of incentives so employees do not focus on one measure to the exclusion of others.

Attitudes that influence the success of incentive pay include whether employees value the rewards and think the pay plan is fair. One idea for promoting a sense of fair- ness is to give employees a say in allocating incentives.

Often co-workers are in the best position to see individuals’ performances. At JetBlue, employees who notice a co-worker contributing to the company’s success can nominate that person for rewards by posting their appreciation on the airline’s internal social net- work. Besides seeing their efforts recognized, employees earn points they can spend on a variety of rewards. The system thus delivers an immediate bonus, tying it more closely to individual acts than an annual pay increase would do. JetBlue’s measurement of the pro- gram found that every 10% increase in people being recognized was associated with a 3% increase in employee retention and 2% increase in engagement.6

Although most, if not all, employees value pay, it is important to remember that earning money is not the only reason people try to do a good job. As we discuss in other chap- ters (see Chapters 4, 10, and 14), people also want interesting work, appreciation for their efforts, flexibility, and a sense of belonging to the work group—not to mention the inner satisfaction of work well done. Therefore, a complete plan for motivating and compensat- ing employees has many components, from pay to work design to developing managers so they can exercise positive leadership.

With regard to the fairness of incentive pay, the preceding chapter described equity the- ory, which explains how employees form judgments about the fairness of a pay structure. The same process applies to judgments about incentive pay. In general, employees compare their efforts and rewards with those of other employees, considering a plan to be fair when the rewards are distributed according to what the employees contribute.

The remainder of this chapter identifies elements of incentive pay systems. We consider each option’s strengths and limitations with regard to these principles. The many kinds of incentive pay fall into three broad categories: incentives linked to individual, group, or organizational performance. Choices from these categories should consider not only their strengths and weaknesses, but also their fit with the organization’s goals. The choice of incentive pay may affect not only the level of motivation but also the kinds of employees who are attracted to and stay with the organization. For example, there is some evidence that organizations with team-based rewards will tend to attract employees who are more team-oriented, whereas rewards tied to individual performance make an organization more attractive to those who think and act independently, as individuals.7 Given the potential impact, organizations not only should weigh the strengths and weaknesses in selecting types of incentive pay but also should measure the results of these programs. For examples of what organizations are doing in practice, see the “Did You Know?” box.

Explanation / Answer

1. in my view, compliance related performance standards in Walmart, as described in the case can help the company in ensuring ethical conduct, as ethical decision making is put on the back burner, if the incentives employees receive is hindered in anyway by taking the ethical path. In this case, employee performance has been linked to ethical conduct, where company has brought together employees that are responsible for ethics and law into one group which then reports to the global chief compliance officer if the company. However, the corporate audit committee determining the company’s progress on the ethical conduct standards will need to be fair and vigilant in their review to ensure actual progress.

2. To strengthen company’s effort to promote compliance with legal and ethical standards the incentive plans should link performance measures to the organization’s goals. These performance goals should be practically achievable, and the employees should be given enough resources to achieve these goals. Also the rewards offered should be valuable to the employees, and the reward system should be fair.

Hence, to ensure ethical conduct, Walmart can device a sound and fair incentive plan, where it should link employee compensation’s variable section to their alignment to the company’s ethical and legal requirements and thus motivate them to follow the ethical conduct desired. Also, Walmart should ensure than the benefits offered are big enough in value for the employees to derive motivation out of it.

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