Nancy Nice, HR vice-president of Smiley Event Personalized Gifts in Nowhere, USA, is disturbed by lagging productivity figures and problems of product quality. She is intrigued by the results of a recent attitude survey of her employees. She has decided to experiment with some form of pay for performance system of compensation. The company's current system of compensation pays either straight hourly rates to non-supervisory personnel or straight salary to all supervisory/managerial personnel with a year-end bonus that is a percentage of base pay as determined by the board. The attitude survey results indicated employees believed that they would work harder if they perceived a stronger tie between their level of effort and their pay. Each of the 200 employees who would be part of the new pay system prepares individual baby gift baskets (toys, clothing, keepsakes, diapers, etc.) which are ordered by customers for delivery to local hospitals for new babies. Some employee discretion is involved in the preparation of the gift baskets and the finished product can be evaluated for quality and cost-effectiveness.

Few respondents to the survey felt that they were recognized in any significant way for working harder than others. People most disturbed by the failure to recognize greater effort were the same people who indicated they were more likely to seek other employment. The organization has a performance appraisal system, but the ratings are generally very high. For the last performance appraisal period, the average rating of effectiveness made by the 20 supervisors was 7.5 on an 8-point rating scale (with 9 representing "very highly effective" performance).

You are an HR consultant hired by Nancy to consider the development of a pay for performance compensation system. In addition, you have been asked to help develop a managerial training program to prepare managers for the new pay system. Please consider the following issues and prepare a report:

What type(s) of pay-for-performance (PFP) system(s) do you recommend for Smiley? Be specific. What (if any) additional information would help you develop the most effective PFP system?

What methods of training (e.g. informational, experiential) do you recommend for the PFP system and why?

How would you evaluate the effectiveness of the PFP system?

What specific criteria will you use to evaluate the results? Can you provide a few examples?