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This chapter analyses the case of pay for performance in the British Civil Service since the 1980s, which progressively moved from a 19th-century classified pay system (in which pay rises came either from promotion to a higher grade or from incremental progression on a given grade) to one in which a fifth or more of pay was obtained by discretionary bonuses. It is argued that the intended consequence or perhaps more correctly, anticipated consequence of performance-related pay — to improve the motivation of public servants — has proved elusive. When a policy is the result of decisions by many actors, it is not clear whose intentions were paramount. In contrast, the unintended or unanticipated consequence was that, although performance appears to have improved in several cases, it did so by other means than motivation. Notably, it came about because of the emergence of processes facilitating convergence between goal setting at the individual and organizational levels. These have supported a renegotiation of performance standards and priorities at the individual level.

This chapter analyses the management of pay and performance in the case study companies, against the background of the embedded systems of the USA and the host countries. Both wage classifications and the issue of performance management are examined. Patterns of decision-making on both dimensions are found to be generally more centralized than is the case for other areas of HR policy. On the issue of wage classifications, patterns of broadbanding are examined, as well as the means by which US multinationals challenge sectorally-based pay determination in Germany. It then explores the issue of forms of individual and collective performance pay, looking at recent changes in the nature of merit pay, particularly the increasingly competitive nature of its allocation through mechanisms, such as forced distributions. It also reviews the extent to which performance management is used as a tool to ‘cull’ weaker performers, and suggests that the origins of such policies can be related to the societally-specific norm of ‘employment at will’.

This chapter examines employment practices and adjustment drawing on both survey data and case study materials. While over 80% of Japanese listed firms maintain a commitment to lifetime employment, many firms have abandoned seniority-based wages in favour of merit-based payment systems based on individual performance evaluations. Some corporate governance practices, such as stock options and equity-based performance measures, negatively impact the continued use of seniority-based pay. Meanwhile, the percentage of in-house board members has a negative impact on market employment patterns, which suggests that external market pressures may be less important than the style of insider governance in determining employment patterns. Despite this continued commitment to lifetime employment, the core of employees covered under such arrangements is shrinking through the active use of ‘benevolent’ methods of employment adjustment, such as early retirement schemes. These finds suggest that some elements of Japanese-style HRM may be compatible with changing corporate governance institutions.

This chapter highlights some important unintentional adverse consequences of mechanisms that are commonly recommended for improving CG. It argues that the circle of reinforcement of monitoring, sanctions and incentives in response to scandals configures a ‘governance for crooks’ that tends to worsen the very problem it is designed to solve. It highlights that one important underlying mechanism explaining this adverse consequence is the ‘crowding out effect’, whereby an excess of extrinsic motivation crowds out intrinsic motivation and undermines corporate virtue. The chapter offer a stylized model of the phenomenon and draws implications for human resource management — HRM — (personnel selection and reward policies).

This chapter presents a fundamental component of every firm's internal control system, its compensation program. The basic paradigm espoused by the proponents of VBM is that what a firm measures and rewards will get done. Consequently, the compensation program must measure employees’ activities that contribute toward wealth creation and reward those efforts. In essence, the compensation plan should pay employees to think and act like owners. Both the level of compensation and its form and composition are discussed. Many observed problems and potential remedies are presented. One characteristic that firms must be aware of is the public's perception that executive compensation has become unacceptably excessive. A complete V_sBM program must consider the political implications of its behavior as these perceptions can and do effect a firm's reputation and ultimately its wealth-creating ability. One mechanism for addressing these perceptions is to consider fairness criteria when designing a compensation program.

One of the many factors that contribute to fragmentation in the delivery of health care services is the law. While laws hindering efforts to coordinate care take multiple forms, many share an aim of blunting problematic incentives in a world in which patients and payers are unable to assess the quality of care. Examples of such laws include licensure-related limits on the corporate practice of medicine, which may preclude direct employment of physicians; and the anti-kickback and self-referral statutes, which circumscribe potential relationships between hospitals and physicians. Private forms of regulating relationships among providers, such as hospital medical staff bylaws preserving physician independence, may also fit this mould. The recent movement to collect and disseminate information about provider quality, however, may make it reasonable to weaken these restrictions, allowing providers to engage in quality- and efficiency-enhancing integration. Payment tied to quality reporting may give them the incentive to do so.

Examines changes that have been taking place in the treatment of regular full-time workers in Japan. Among the developments examined are the introduction of performance-related pay, flattening of the age-earnings profile, specialist training, and shorter working hours. Looks at trends in labour mobility and concludes that long-term employment is still the rule for the majority of these employees.

Corporate governance can be defined as a system that constitutes an institution that constrains relations between corporate managers and various stakeholders, including shareholders, creditors, workers, suppliers, and customers. Under this broad definition, corporate governance is a system of various sub-systems that are complementary to one another. This chapter focuses on two sub-systems of Japanese corporate governance: corporate finance and human resource management. After briefly documenting the characteristics of the Japanese corporate governance in these two sub-systems, the chapter discusses how each sub-system has been going through substantial changes in recent years. Examining the data for fifty-eight listed companies, the evidence shows some degree of complementarity between the two sub-systems. The firms that have a non-traditional ownership structure (especially high with foreign ownership) seem to have more non-traditional human resource management practices.

The chapter introduces the main issues raised by the second section of the book. First, the authors argue that, in recent years, a growing proportion of firms introduced incentive pay schemes. Moreover, the economic recession has increased interest in firm practices that may improve performance and employment, and in public policies to promote such practices. Most studies have suggested that performance-related pay schemes are usually associated with improved employee productivity. In particular, the book focuses on a new wave of studies that have used company-specific data, with credible identification strategies, to investigate the effects of the introduction of performance-related schemes. The chapter also addresses the topic of a renewed interest in incentive systems that go beyond short-term effort and give employees a stake in the long-term prospects of the firm.

This chapter examines the issue of paying more to physicians who perform better on some predetermined criteria. The debate is not about paying more for better service, but about whether the quality of physician services can be measured accurately by an external body so that these incentives can improve patient care without wasting money and creating an environment in which gaming to attain higher payment might occur. The chapter reviews economic evidence on pay for performance and summarizes relevant research findings from the fields of social psychology and sociology. It also looks at alternative mechanisms for controlling health care provider behaviors, with an emphasis on pay for performance for physicians rather than physician groups or health care provider organizations (for example, multiprofessional clinics or hospitals). The discussion focuses on many aspects of health care quality, including clinical effectiveness, efficiency, and patient centeredness.

The diffusion of incentive pay schemes ranges from around 10–15 per cent in some European countries to over 40 per cent in Scandinavian countries and the US. Individual pay and profit/gain sharing schemes are widely diffused, while share ownership schemes are much less common (particularly in Europe). Incentive pay is found to be less common in countries where there is a large majority of small firms or where the share of family firms is larger. Higher product and labour market regulation is associated with a lower diffusion of incentive pay. Capital market development is a necessary requirement for a wider diffusion of incentive pay (i.e. in particular sharing and ownership schemes).

This chapter addresses the dynamic interaction between micro-level institutional change and macro-level reforms of labor institutions, emphasizing on the compensation institutions. It moves beyond the issue of wage levels in the aggregate to analyze the development of the models of compensation used by state-owned enterprises (SOEs) and foreign-invested enterprises (FIEs) and the role that foreign investors have played in China’s ongoing compensation reforms. Then, it argues that Chinese officials, frustrated by SOEs’ slow progress on wage reforms, allowed foreign investors increasing leeway to introduce new compensation models. It begins with an outline of the “iron rice bowl” and state compensation reforms. Next, it analyzes the efforts of foreign investors to transfer their compensation institutions to China, and, related, the comparable success of those institutions in China. The sections on Japanese and US compensation systems reveal the distinct approaches taken by foreign investors and the adjustment processes that each have undertaken in China. Finally, it addresses how foreign investors and Chinese actors have contributed to Chinese wage reforms.

Most studies suggest that when firms have good performance measures, performance-related pay is associated with improved employee productivity and better worker–firm match. If all firms that would benefit from performance-related pay have introduced it, subsidizing other firms to switch through tax breaks and other forms of state assistance will yield lower returns than estimated for current users. But it is also possible that many firms retain existing pay systems when they could do better with performance systems, which would justify state promotion of some schemes. Making pay dependent on company performance may also be a way for firms to share risk with workers through cost adjustments, which could preserve jobs in difficult times. But there is also evidence that incentive schemes do not necessarily improve performance in all contexts and situations. For example, firms often introduce financial participation schemes for reasons that have little or nothing to do with incentives.

This chapter discusses a key issue in the financing of primary care: physician reimbursement. It first considers the widening disparity between the obligations of the primary doctor as communicator and his rate of pay and asks why surgery and other invasive procedures intuitively carry more weight, and consequently higher remuneration, than careful consideration, diagnostic acumen, patience, communication, and management of chronic conditions. It then explores the paradigm shift in physician payment with the advent of the Medicare Economic Index and some of the reasons why physicians today prefer group practice. It also looks at the viability of pay for performance (P4P) and a revised reimbursement model for primary care of the elderly that incorporates pay for connectedness (P4C).

One of a board’s most important roles is setting executive pay. This chapter introduces the various components of executive compensation schemes and analyzes the pay-setting process using the efficient contracting hypothesis. Executives and the board bargain over how sensitive pay will be to the firm’s performance, weighing the incentives generated by performance-based pay against the misallocation of risk that results when risk that could be diversified away by shareholders is transferred onto a firm’s executives. Executives and the board also negotiate over the level of pay, leading to outcomes that reflect the strength or weakness of the board. This chapter uses the story of Michael Eisner’s compensation during the 21 years he was Disney’s CEO to explain the efficient contracting hypothesis and to illustrate the problems that can arise when executives’ compensation is closely tied to a firm’s performance.

The author suggests that performance-related pay, because ill-designed for bankers or not sufficiently widespread among employees, has played an important role in the last two world crises. Compensation systems paying hefty bonuses to bankers when they make profits, but not penalizing them sufficiently when they incur losses, are clearly encouraging excess risk-taking in the financial industry, whereas pay scales for millions of workers determined in centralized wage-bargaining structures that do not allow for performance-related compensation are also problematic: they reduce incentives for workers to move to high productivity firms and do not adequately encourage efficiency and identification of workers with the enterprise’s interests. New empirical evidence is offered on the relevance of these interpretations of the crisis. In particular, two fundamental issues are raised: the misalignment of shareholders’ incentives (and CEOs’ incentives in the financial sectors) with those of society at large, and the limited coverage of performance-related pay in southern Europe.

This chapter discusses the three most widely used payment systems for hospitals. While concepts differ, payment models in secondary care have parallels to those used in primary care. In retrospective systems, providers’ costs are fully reimbursed after they have incurred which leads to cost escalations and inefficiencies. In prospective systems, payments are determined ex ante without any link to the real costs incurred by the provider. Prospective payment systems are of two kinds: variable or fixed. The former are often referred to as activity-based financing, while fixed payments refer to block grants or global budgets. The three models are compared emphasizing their pros and cons. In practical policy, prospective activity-based funding has increased in popularity, but many countries opt for a blended model involving a fixed budget together with activity-based incentives. The chapter ends with a brief discussion of various pay-for-performance schemes.

We compare our theory’s prediction regarding executive compensation. The theory’s predictions are in line with what Peter Drucker, J. P. Morgan, and Warren Buffet have argued as a fair CEO compensation with respect to an average employee, or what it used to be in 1950s-60s in the U.S. We offer guidelines for designing a more reasonable and fair pay distribution in large corporations.

Both Japan and Korea had to whither important economic crises that inspired heated debate about the need for change in their economic institutions. This chapter discusses and compares the subsequent adjustments in their employment practices. It confirms important similarities in pre-crisis practices such as employment stability and seniority wages, and post-crisis adjustments such as the introduction of performance-related pay, and a rise in labour market dualism and non-regular employment. At the same time, it also shows important differences before and after the crises between Japanese and South-Korean employment practices. To discuss these developments, the analysis draws on recent insights in institutional theory and shows that the changes in employment practices have been highly endogenous in character as they have been shaped by existing employment practices through bricolage.