Mgmt 483 - Final Presentation Paper on Pay for Performance

MGMT: 483

4/29/2011

Final Presentation Paper on Pay for Performance

Pay for performance is a topic that is discussed in chapter 9 and 10 of our text book, according to our text, pay for performance is "a pay system in which the pay varies with some measure of individual or organizational performance, such as merit plans, lump-sum bonuses, skill based pay, incentive plans, etc..."(Milkovich, Newman, & Gerhart, 2010, p. 661). The definition that was provided in our text gives us great incite on how pay for performance is used by companies to determine the level of pay an employee or group of employees will receive. The National Football League or NFL is an organization that uses pay for performance to determine the pay grades of their employees between the numerous individual organizations that make up the NFL. The NFL uses a combination of plans that are composed of mixing individual and group plans, this is done to motivate individual behavior and insure that their employees are working towards team and organizational goals. Although the NFL has a pay for performance pay system, their definition is a little bit different from that of our text. The NFL's definition of pay for performance is more or less a "wait and see approach" (Riper, 2010). In the NFL, getting big money requires staying on the field and producing big numbers. Those enormous contracts you read about, only a portion of the money, usually less than half, is guaranteed, and unlike basketball and baseball players who collect their full contract no matter what, the NFL requires a "wait-and-see approach" to compensation. Due to the fact that the NFL uses this type of pay structure, there are a variety of methods that are used when pay decisions are determined. The methods used are comprised of merit plans, lump-sum bonuses, skill based pay, incentive plans, and many other forms of pay for performance.

The pay for performance compensation structure that the NFL uses starts with a skill based pay structure. According to our text book skill based pay is "Pay linked to the depth or breadth of the skills, abilities, and knowledge that a person acquires that are relevant to work success" (Milkovich, Newman, & Gerhart, 2010, p. 665). Players that reach the NFL receive a salary that is skill based. This base salary is determined by the individual's althelthic skills and knowledge of the game of football that a given individual possess. College football players are scouted and evaluated over the course of their college season, and also at scouting combines; this gives coaches and owners of NFL teams the ability to assess the skills and knowledge that specific athletes possesses. After the course of the college football season and the combines, coaches and owners have a good idea of those athletes that they would like to have as a part of their organization. Once the decision has been made that a specific NFL team wants a given individual, or individuals, those players are then drafted due to their personal skills and talent. College Athletes that get drafted by the NFL receive a base salary based on talent and skills that they possessed prior to them entering their professional career in the NFL. The base salary that an NFL player receives must exceeded the league minimum of $310,000, and that minimum dollar amount must increase for every year of experience that a given athlete acquires. It is a requirement of the NFL that each team's total compensation package must not exceeded the salary cap of $127 million dollars. Due to the fact that most players coming out of college are highly skilled it is very important for owners of NFL teams to not over compensate the base salary of an NFL player so that the team stays under the salary cap ( a national statistic shows that in 2009, the average base salary of an NFL player is $990,000). Overall skill based pay in the NFL represents a clear form of pay for performance simply due to the fact that the base salary of athletes is derived from the skills, abilities, and knowledge which the athletes possess. Although skill base pay is the starting point of the National Football Leagues compensation system there are many other methods of pay for performance compensation that play a large role in the overall compensation package that NFL players receive.

An additional pay for performance method the NFL uses is a lump-sum bonus. According to our text book a lump-sum bonus is defined as "a payment increase given to an individually who receives the amount of money in full at a predetermined date. Also because this amount is not factored into base pay, any benefits tied to base pay do not decrease" (Milkovich, Newman, & Gerhart, 2010, p. 659). Most lump-sum bonuses are paid out to rookie players upon being drafted or players extending their previous contracts in the form of a signing bonus. The signing bonuses normally only apply to those individual athletes whom are chosen in the first to fifth rounds of the NFL draft. Customarily the first and second round draft picks receive the largest signing bonuses around $1 million dollars and decreasing as the draft continues. The reason behind organizations giving out such large signing bonus incentives to individuals is because these bonuses don't adhere to the league salary cap; also, this large lump sum helps attract top talent to the organizations. This form of compensation becomes very critical to NFL rookies. This is guaranteed money for them unlike their contracts which are based strictly on there performance. It may seem that they are receiving a huge amount of money to play football, but they have to perform at a high level and avoid injuries to receive they full amount of compensation that they were originally offered. An NFL rookie may blow out his knee in pre-season, be placed on injured reserve and may not rehab correctly and be unable to ever play a game in the NFL. This makes their signing bonus critical for their financial stability. Under such circumstances this may be the only form of compensation they receive from the NFL and need to be wise on how they use this lump sup bonus, for example, not to purchase cars, houses etc. on impulse.

The next type of pay reward that is offered in the NFL is Merit pay. The book defines merit pay as "a reward that recognizes outstanding past performance, merit programs are commonly designed to pay different amounts, depending on the level of performance" (Milkovich, Newman, & Gerhart, 2010, p. 660). This type of pay structure has been shown to have a significant impact on performance. When there are high performance ratings there is a good statistical chance that they are related to high merit increases. When businesses

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