Performance-Related Pay Issues - Essay Example

BONIFACE MUTINDA ORDER NO:126402 28TH MAY 2006 Although the relationship between pay and performance is complex and problematic performancepay remains of central interest to employers as a human resorting strategy aimed at improving organizational performance. Comment critically on the above statement. Performance pay is a system of rewarding employees which is based on perceived out put often without clear measurement formula but which depends on the discretion of the supervisor or the line manager concerning the employee. Compared to other pay system performance pay is more complex and more difficult to implement. A critical look at performance pay however points to the fact that this method utilizes only performance as the determinant factor. It neglects other important determinants of pay such as no knowledge and skills, educational background and orientation, possession of relevant experience and other extraneous factors that play equally important roles in determining the amount of salary. The performance pay system may sometimes lack proper control system therefore giving superiors unwarranted control over the system. The system relies on money as the sole motivator hence it assumes that workers are so interested in monetary gains such that they will increase production as long as they are paid for it. However there exists checks and balances which if put in place will make the implementation process of this system all much easier and acceptable to the employees. Many organizations have turned into the performance pay system as their basis of rewarding, reviewing salaries as well as for job evaluation. Also many organizations have resorted into the performance pay system in order to motivate their employees who achieve outstanding and exemplary results. The pay system just like many others is vulnerable to abuse and misuse. Research has shown that there have been many cases of discrimination and segregation, which happens in organization as a direct result of an employee's gender, colour, race, political orientation as well as religious affiliation. Performance Pay and Unfair Discrimination When discrimination is applied to employees, it contributes to de-motivation and therefore affecting output. Countries have put in place anti discrimination laws to check on arbitrary and unfair discrimination against employees. Discrimination can be in various forms such as, on gender, race, nationality, marital status, ideology, political inclination, disability or religious affiliation. Anti discrimination laws protect employees and ensures that they are treated in respect to terms entered in the contract of employment. Employers should ensure equal pay regardless of individual backgrounds or circumstances. Equal pay is different from identical pay in that the latter depends on other factors such as length of service and age. Discrimination can either be direct, i.e., whereby and employer treats a person less favourably than others on the grounds of sex, marital status or race. Indirect discrimination occurs whereby the effect of a condition of employment is discriminatory. Employers should offer or make adjustments to working conditions in order to ensure that vulnerable groups are not at a disadvantage and thus they can perform or deliver like the rest of the employees. Victimization should be eliminated for it will affect the output of the victim and eventually lead to unfair reward. Management of companies can use the performance pay system as a human resource strategy in order to attract and retain the best employees. There is a significant relationship between pay and performance in order for organization to attract appropriate staff their pay must look relatively attractive. While it is in the interest of most employees to earn the best salaries possible it is worthy noting that the interest of employer and employee significantly differ. For the employer the interest is more on employee performance hence they will not mind paying more in order to getting more production. Given a chance most employers would choose any system as long as it favors their objectives regardless of its impact on the employees well being. In the performance pay those who emerge top performance will take home not only bonuses and awards while am employee ask the power to determine what their pay shall be this is limited by the fact that there can only be a few top achievers hence not everyone will earn that extra "dollar" for their handwork. This may bring about discontent among the employees especially those who aim to be at the top but cannot make it. While it is possible for an employee to achieve or even exceed the set targets this is not always reflected proportionally in their pay. This is largely because the element of performance pay in the whole salary may only be 10% or less. For example in a garment production job there will be a maximum number of pieces. Pay is very structured and it is pegged on rather static terms, which can at best be reviewed a few times in a year. Performance on the other hand is not clearly pre-determined and often is directly proportional to an employee's hard work. While increased performance is encouraged and backed by the management, the same management may not encourage enquiries or demands for pay increase. Usually pay is a thorny issue to management rarely do they treat it as a positive subject. This is what performance pay aims at solving. Actually employers look at pay as expenditure but the same employers look at performance as an investment this is so despite the fact that the two are independent on each other. on the other hand employees view pay as reward not a liability. Some employees especially the least motivated may look at performance as liability especially when they have a feeling that which ever their performance, the pay remains constant. This is where performance based pay comes in handy. It brings about a common ground of organizing a beneficial arrangement for both the employee and employer. In this system, employees work hard in order to earn extra pay while the employer pays higher in order to achieve maximum out put & production as well as to retain the best hardworking employees. Oftenly, employers are faced with challenges while utilizing performance pay system. Just like other systems, every strategy has its unique challenges, which must be addressed in order for success to be attained. This is a challenge in the sense that they work and pull in different directions thus unity of direction misses out in the organization. The other challenge associated with the performance-based pay is that it is a fertile ground for disputes related to performance ranking. Disputes also arise when performance is being measured, as there may be no clear measurement tools of performance especially in work pertaining to service delivery. In some cases, the reward paid for the performance may be too little and of no significance to the salary therefore putting into dispute its relevance. Equally important to note is the fact that performance pay system brings about inequality amongst employees even employees at the same grade. This arises because the system encourages situations whereby employees in the same job group are paid differently for doing similar work. Performance pay system is also prone to bias in regard to gender in that a male supervisor may favor a female employee and vice versa. Biasness may also be noted in regard to race especially whereby we have employees from different racial backgrounds. To overcome these challenges and in order to utilize performance pay system properly, human resource managers must steer clear from all forms of injustice and unfairness by operating transparently. This will reduce incidences of subjectivity and uncertainty thus reducing preference of tribunal court cases, which costs organizations valuable time and money. In order to ensure transparency, performance appraisals must be carried out regularly based on objectives and regulations of the organizations. Performance appraisals are used to determine the type and amount of work to be given out to the employees. In order to ensure an acceptable and workable performance based pay, the objectives of the organization must be set and agreed upon between the employer and the employee. This must include clear understanding of objectives in order to avoid a scenario whereby the employer will interpret the objectives differently from the employee. Finally, there should be a strong legal redress mechanism for those who are aggrieved or those who feel shortchanged by the system. This promotes cohesion and co-existence amongst the staff fraternity. Performance pay system is hard to implement because of various constrains. Oftenly, out put measurement is hard to determine and compare across departments especially in large organizations As a human resorting strategy, performance pay aims at bringing about consistency with stipulated policies of an organization concerning pay. Since it is in the best interest for any organization to operate according to the laid down procedure, human resource managers rely on performance pay to motivate employees, to reward hardwork, to give fair compensation directly proportional to the individual out put as well as encouraging commitment. To thrive in an already flooded market, to retain the very best of employees in a business world where competitors constantly "threaten" to poach the best employees from rival organizations through means of offering relatively more attractive pay, the human resource department utilizes performance system to the extent which employees can get motivated. Salary increment is a sensitive issue to many employees and any slight indication of inequality in salaries amongst employees in the same job groups or job grades can be a recipe for chaos and restlessness in the organization. Performance pay should be applied with an aim of bringing about fairness and justice with no trace of bias of any form or discrimination. Performance pay should ensure competitive pay levels, which cut across the whole organizational work force since output is directly proportional to pay in respective grades or job groups. Therefore, performance pay is a strategy that is very helpful in maintaining both motivated work force and optimum production. In most cases performance pay leads to employees getting equitable pay for similar job output. If any pay system rewards employees differently for the same effort and out put it risks loosing it's human resource to it's competitors something which may result to poor profit postings. This is because employees will develop perceptions towards the organization based on the way they are paid in comparison to their counterparts either within the same organization or in different organization. Fair and just compensation creates a positive attitude in employees towards their job and the organization. Performance pay, if administered properly, leads to uniformity in the salary structures of the organization, which implies that any chances of salary anomaly are reduced significantly by this system. It enhances how information is communicated throughout the organization. It encourages openness since every one is meant to understand what for instance, in a sales firm, the sale of x units by a sales executive would yield into, in terms of pay. Information flow is key to every organization. Compared to other pay system information flow is enhanced in the performance pay system. Performance pay system gives human resource managers full control of their portfolios therefore they enjoy more freedom in the execution of their duties without interference from the board of directors or any other central authority. As a rewarding system, performance pay offers a forum for pay evaluation. Pay is reviewed regularly, therefore, the human resource department retains up to date and competitive pay plan. In order for the organization to retain its best employees, pay must be treated with the seriousness it deserves, failure to which losses will result and the human resource department will be failing in its duty to the organization. Performance pay system ensures that the duties and responsibilities of each employee is documented properly in position description forms, this comes in handy during the process of evaluation and classification of positions to draw their value with proper documentation. Employees are kept updated on the duties pertaining to their grades and the responsibilities thereof, human resource managers rely on documented information in ensuring that the organization retains competitive pay system in the labor market. A critical look at performance pay, however, points to the fact that this method utilizes only performance as a variable in rewarding. Other important factors such as knowledge and skills, educational background & orientation relevant experience should play an equal if not bigger role in deducing pay. Performance pay system reduces bureaucracy especially in the public sectors. Bureaucracy thrives in stringent rules, which are just there and are not to be "tampered" around with. With performance pay an opportunity is created where discretion is used to motivate the deserving employees to work ever harder. Performance pay also gives managers a lee way in determining and singling out good performance. Sociologist and psychologist however view performance pay skeptically especially due to the assumption economists make about money being a motivator to the employees. They argue that before any pay plan is initiated or introduced, proper study should be carried out to determine what really causes people to work hard, how they view themselves and how they like being viewed. It is worthy noting that there are those employees who would not care how much they are paid as long as they are satisfied psychologically. They draw there motivation from factors like achievement of set targets, challenging job environment and good working conditions; "performance is greatly tested by the fact that changes to the better are valued less than changes to the worse" (Heckman et al, 1996). Therefore employees may fail to respond significantly to pay increase, as they would to a pay decrease. This puts performance pay system into a great test as a valid human resourcing strategy. It cannot fail to be noted that performance pay attracts human resource strategists because of the widely accepted assumption that money is very valuable to employees. Performance pay can be counterproductive if some employees perceive it to be unjust simply because they cannot be the top performers, since there will always be those who perform better than others. A performance pay system risks creating discontentment amongst low achievers. Performance pay works best where there are proper structures and reporting system and when employees clearly understand and identify with the system. The management benefits from the performance pay in that it directly contributes to high production, hence making the system very popular compared to pay systems, where pay is dependent on experience gained or duties and responsibilities being performed by the employee. While other systems may lead to indirect production increment, performance pay leads to tangible output production. Performance pay and work measurement Performance pay should employ work measurement techniques in order to ensure fairness in pay-related performance. A good work measurement technique will answer the following questions: - How long and when. It is necessary to provide the answers to the mentioned questions in order to improve working methods, to develop costing systems, production schedules and incentive skills and also to establish manning hours required (G. A. Cole, 1996). Work measurement aims to measure human performance. It follows the following procedures: - 1. Describing the method to be measured. 2. Breaking the job into job elements. 3. Measuring the performance of the employee. 4. Rating of performance and 5. Determining the standard time. This method produces results, which are reliable in terms of data, something that leads to easy planning and controlling. It ensures efficiency, reliability in the basis for incentive skills and it leads to higher productivity. Work study relies on subjective judgment in that, the rating of performance and the determination of the hours worked, lies on the judgment the supervisor, line manager or whoever is in charge. To ensure efficiency in work measurement, the job must be clearly described. Since no one can measure an operation or output, they even don't understand clearly, it then follows that the job is broken down into small job elements and then the performance is measured. Performance measurement can be done by a use of a stopwatch especially for short-term activities or on hourly basis for long-term tasks. This is what is referred to as Direct Time Study. Once enough elements have been timed, a summary of the total time is reduced. Rating This is a technique of measuring performance, which involves the supervisor determining and deciding how quickly, or slowly an employee is compared to the established standards. These standards are pre-determined and they vary from organization to organization and from country to country. It can also be defined as a rate at which qualified employees will naturally work at a job following the laid down relations and rules. It assumes that employees' output will be at a certain level as long as they are motivated. Therefore, if an employee does not achieve the set targets, it is interpreted to mean that they are working slowly. If they meet the set targets, it is interpreted to mean that they are performing and are fit for pay or reward. However, there are different weaknesses associated with this method. Such include, subjectivity and high probability of making mistakes, especially if the rater is not familiar with the job he/she is rating. Analytical Estimating It is a form of calculated guesswork, which is very subjective and least reliable. It involves breaking a job into big elements and allocating basic times according to the estimator's previous knowledge of the operations and his/her skills in estimation of time. It is commonly used for one- off jobs. Human resource strategies should decide on which of the above techniques suit the organizations since each organization is unique in needs. Therefore, they can choose how to measure performance depending on their circumstances. Performance pay and high performance Since every employee is paid a certain percentage, which is dependent on his/her achievements, it is expected that this will motivate employees into working very hard, therefore achieving high performance. In this system, pay is the motivator of enhanced performance and better productivity. It should be incorporated in the organization in a way that befits well into the management structure. It should also be noted that pay alone without proper management structures cannot achieve high performance. The pay needs to be administered promptly. This is because employees are conditioned that their efforts will yield into cash bonuses or any other reward and therefore if the reward were not paid promptly, that would result to anxiety on the side of the employees. Pay needs to be commensurate with the input. If it's not commensurate, resentment will arise and therefore performance for pay becomes a barrier to organizational success. The expected pay, amount or quantity should be known before hand by the employees. This helps in alleviating complaints upon completion of tasks. Pay must also be paid strictly and in whole. Finally, the pay must be realistic for the kind and amount of job done. Merit Rating It involves rating each employee in one of the following categories: - Excellent, Good , Average, or Poor. The above rating is based on the ability of the employees to communicate or on how they relate with others at work and whether they possess any leadership or motivation qualities. It is also based on employees' knowledge and skills and their judgmental and intellectual capacities. The main disadvantage of this system is that it is very vulnerable to bias from the rating authority. This can be manifested through the rater being too lenient, subjective or lacking in objectivity. Job Evaluation This is a system that rates employees on the basis of a pre-determined scale. The scale rating may include factors such as the level of qualifications, responsibility associated with the job, physical attributes of the employee and the working environment, for instance, an employee working in a hardship zone may be rewarded with a hardship allowance. The system may also rate employees following physical attributes like appearance, height and body build. The level of expertise may also be used as a rating factor. The main disadvantage of this system is that it is too subjective. Performance pay and Maslow's hierarchy of needs Performance pay assumes that money will always motivate employees. It fails to note that worker have further needs which may not depend on money for fulfillment. If the workers are at the top of the pyramid, they may not look at money as any factor to lure them into increasing their performance. Therefore, performance pay relies on only money as a motivating factor, something that makes the system insufficient when applied to different categories of employees. According to Maslow, people tend to satisfy their needs in a certain order. Until a particular group of needs is satisfied an employee's behaviour will be directed by efforts to satisfy that particular group of needs. Therefore, the employee is likely to direct all the efforts in a certain direction that is in line with his/her felt needs. This can significantly interfere with output. Performance pay and Herzberg's motivation - Hygiene Theory Herzberg 1959 concentrated on studying satisfaction at work. He found out that some factors lead to job satisfaction. He called those factors 'Motivators' while other factors contribute to dissatisfaction. He called those factors 'Hygiene Factors'. He noted that motivators have negative effects in that; lack of achievement can lead t dissatisfaction. On the other hand, hygiene factors have their positive aspects, for instance, salary can be a source of satisfaction. He classified motivators as, achievement, recognition, work itself and advancement. Performance pay can borrow from this theory by ensuring that pay is balanced with other equally important factors. Performance pay and equity theory The equity theory states that, " in a working context, people make comparison between themselves in terms of what they invest and what they get". This theory is applicable to performance pay in that, employees will increase output proportionally to what they can get out of the input. On the other hand, some employees may work slowly on the grounds that they are being underpaid. Performance pay and achievement motivation According to McClelland, people with a high need for achievement possess the following characteristics: - They have a consistent need for achievement. They seek tasks in which they can exercise personal responsibility. They prefer tasks, which provide a challenge without being too difficult, and which they perceive as to fall within their mastery. They want feedback on their results. They are less concerned about their social or affiliation needs. He concluded that the need for achievement is developed more by childhood experiences and cultural background than it is by inherited factors. Although he did not make a direct reference to performance pay from his conclusions, we can say that pay is not a very key factor, which can contribute to performance. Performance pay and the Expectance theory This theory was based on three factors: - 1. Expectancy It can be defined as the extent of the individual's perception or believe that a particular act will produce a particular outcome. 2. Instrumentality It can be defined as the extent to which the individual perceives that effective performance will lead to desired rewards. 3. Valence It is the strength of the belief that attractive rewards are potentially available. According to V. H. Vroom, the three factors create a formidable force for motivating individuals to put in effort and achieve a certain level of performance, therefore obtaining rewards at the end. According to this theory, individuals will only act if they have a reasonable expectancy that their behaviour will lead to the desired outcome. It also implies that job satisfaction follows effective job performance rather than job satisfaction leading to effective performance. Therefore, performance pay may not be an effective strategy in respect to motivating the employee according to this theory. Performance pay and the Goal Theory This theory states that motivation is driven by the goals and objectives that individuals set for themselves. While for the expectance theory, a satisfactory outcome is the biggest motivator; the goal theory suggests that the goal is only a central driving force. Goal theorists also argue that an individual's motivation is improved when feedback on his or her performance is available. Performance pay is supported by this theory in that it is centred on the final goal (output). Performance pay and Reinforcement Theory Reinforcement theory suggests that a given behaviour is a function of the consequences of earlier behaviour. Therefore, it argues that, all behaviour is determined to some extent by the rewards obtained from previous behaviour. Consequently, positive reinforcement leads to more effort and hence high performance. Applied to performance pay, this theory is supportive since it is employee's performance that will cause them to earn more and to continue performing highly. Performance Pay and Job Evaluation Job Evaluation is a set of methods designed to compare jobs systematically with a view to assessing their relative worth. (Cole, 1995) Job evaluation produces a ranking order in the organization that is based on objectivity and rationality. It clearly states whose job is more demanding than whose, as well as whose job is more demanding. It also aims at assessing jobs. Job evaluation is different from performance appraisal. It is carried out by groups rather than individuals by utilizing fairness and consistency in order to reduce the element of subjectivity. Though job evaluation does not determine pay, it provides relevant data, which is useful in decisions concerning pay. Job Evaluation Methods 1. Non-Analytical Methods These are methods that compare jobs and then rank them. It is a fair way of discriminating between jobs, which are not similar. 2. Analytical Methods These are methods, which break jobs down into their component tasks and associated responsibilities by assessing each job inorder to allocate points for each, and also allocating monetary sums to them. Performance pay can be effective if it can borrow from this method since this will reduce incidences in pay quality. Conclusion. Performance pay is not yet a reliable motivational pay system. BIBLIOGRAPHY 1. Alan S. Blinder paying for productivity: A look at the Evidence. Washington DC. The Brookings Institution Press, (1990). 2. Alexander D. Stajkovic and Fred Luthans, " Differential Effects of Incentive Motivators on Work Performance", Academy of Management. 3. Bengt Holmstrom and Paul Milgrom, " Multi-task Principal Agent Analysis: Incentive Contracts. 4. Cole, G.A. Organizational Behaviour, DP Publications (1995). 5. Edward P. Lazear, "Performance, Pay and Productivity". American Economic Review, Vol. 90, No. 5 (2000). 6. Heckman, "What do Bureucrats Do" The effects of Performance standards and Bureucratic Preferences on Acceptance into the JIBA Program", in advances in the study of Entrepreneurship, Innovation and Growth, Vol. 7 (SAI Press, 1996). 7. Herzberg, F Work and the Nature of Man Staples. Great Britain. (1968). 8. Iris Bohnet and Felix Oberholzer - Gee, " Pay-for -Performance: Motivation and Selection Effects," In Bruno Frey and Morgit Osterlog, eds, successful Management by Motivation Balancing Extrinsic and Intrinsic Incentives. Berlin: Springer, (2001). 9. James N. Baron and David M. Kreps, Strategic Human Resources. Frameworks for General Managers, New York: John Wiley and Sons, 1999. 10. Maslow, A. Motivation and Personality, 3rd Edition, Harper and Row (1987). 11. McClelland, D. The Achieving Society, Van Nostrand. (1961). 12. McGregor, D. The human side of the enterprise, McGrowhill. (1960). 13. P. M. Wright and W.R. Boswell, Desegrating HRM: A Review and Synthesis of Micro and Macro Human Resource Management Research. Journal of Management, June 1 2002; 28 (3). 14. Vroom V. Work and Motivation, Wiley (1964). Read More