The Use and Impact of Performance-Based Pay Systems - Coursework Example

Running head: The use and impact of performance-based pay systems. Student’s name Institution Course Professor Date Introduction The issue of employees’ performance has occupied a lot of management attention for a very long time in order to attain the objectives of the organization. Constant motivation of employees has become a fundamental issue to the overall effectiveness of an organization. Therefore, many employers have increasingly sought to link pay to performance in most of their operations. For instance, Booth and Frank (2009) argue that jobs with performance related pay (PRP) can attract workers of higher quality and also induce them to provide more effort in their work. Many economies around the entire globe have advocated the use of performance pay systems. The major rationale for promotion of the system is to improve the resilience of jobs and employment in the event of large economic shocks such as global financial crisis and Asian financial crisis. The pay structure should be designed in order to achieve better employees’ performance. Armstrong (2005) defined performance pay system as a process of issuing financial rewards to a person which is linked directly to individual, group and organizational performance. It has been perceived as a compensation scheme that creates linkage between employee and the pay. For instance, an individual’s increase in salary package is majorly dependent on his/her merit rating (Swabe, 1989). Alternatively, performance-based pay systems include both financial and non-financial rewards such as recognition. The reinforcement theory illustrates a direct relationship between desired target behaviour such as performance and its effects such as pay. It proposed that pay need to be utilized to produce impacts for desirable behaviours such as high performance that can eventually reinforce behaviours (Perry, Mesch and Paaarlberg, 2006). This pay system can be influenced by some factors such as high levels of trust, close geographical proximity, adequate rewards, degree of professionalism and effective performance appraisals (Condrey and Brudneys, 1992). The demand for rapid and effective organizational change in the current dynamic social, economic and political environment needs that every employee to continually re-align his/her performance with the evolving goals and objectives of the organization. The performance based-pay system had been associated with the goal of improving the incentives and motivation among the employees (Brown and Heywood, 2002). The linkage of rewards to employee performance especially by the private sector has been attributed to enhance the attainment of organizational objectives. Thus compensation has been tied to the performance of employees in the organization (Mullins, 2005). Main body Uses of performance-based pay system Performance-based pay system has been a key element at the reform of pay incentive for public servants in most countries such as United Kingdom. It was deemed to replace the pure time-based pay with annual increase that was based on seniority. The principal-agent moral hazard model states the theoretical rationale for the performance related pay systems. This pay system has fixed and variable components. The fixed component includes basic wage, annual increment and the contractual bonuses (Armstrong, Michael, and Brown, Duncan, 1998). The variable component comprises the wage increase that is based on productivity formula. The profitable model, the productivity model and the productivity/profitability matrix model that links productivity and profitability Pay has been recognized as an important element in the employment relationship. For instance, it represents a vital part of the employers’ costs, performance and also competitiveness. To the employees, they are fundamental to the standard of living and a measure of the value of the services rendered. Also, it affects every aspect of macro-economic stability for example inflation, employment, social-economic development and the purchasing power. Responsibilities if allocated appropriately in the workplace will guarantee equal opportunities for every employee to make the best use of his/her skills and talents (Perry, Mesch and Paaarlberg, 2006). With adequate investment, human resources can be easily developed. In this pay strategy, evaluation of an individual workforce and organizational influence has vital influence on the amount of pay increases to every workforce. The performance-based pay systems attempts to align the employees’ actions with organizational objective through modification of remuneration in response to organization end results. This system takes consideration on performance as the key basis for pay increase. It creates a conducive environment whereby the workforce is able to work hard to attain optimum performance (Gomez-Mejia, 1990). However, the implementation of this system comes with many challenges, for instance the likelihood for high turnover rates as medium and lower performing workforce may feel discouraged when they fail to get merit increases from the organization Impacts of performance-based pay system Positive impacts The performance–based pay system has impacts on the workforce and the organization as a whole. First of all, this system illustrates that the performance management is a shared responsibility between employees and the workforce. It aligns the individual employee goals with the company’s objectives. The use of performance appraisal system has an effect on other human resource systems and also the organizational strategy. An effective and efficient organization’s performance appraisal system is fundamental in ensuring the success in the selection, training and employees motivation practices (Milkovich and Wigdor, 1991). Improvement in areas such as recruitment, retention and motivation of the employees can be carried out by pay for performance. Consequently, this pay system can improve the equity of pay practices due to provision of more compensation to the well-performing workforce. The use of team-based reward structure will incorporate teamwork with devoid of employees pitting one another in competition for individual rewards. Performance based pay systems can be a source of competitive advantage with its potential to influence the work attitudes and behaviour of the employees and ultimately the effectiveness and productivity of the organization (Milkovich, 1998; 16). This sustainable competitive advantage can be achieved by motivated employees leading to greater performance and productivity. Generally, the employees are able to work harder in order to receive monetary rewards from their employers. This pay system is introduced in an organization for performance enhancement in order for competitive advantage and equity (Milkovich & Newman, 1996). The rationale for the introduction of performance-based pay system is to assist in selection and recruitment of incoming workforce, facilitate change in organizational culture, ability to reward and acknowledge performance and encourage flexibility. Moreover, this remuneration system contributes towards enhancing the competitiveness of the firm. For instance, the use of performance-based measures effectively will promote the continuous improvement in productivity and quality for the sustained competitive advantage of the organization over its competitors. The remuneration system is greatly linked to the performance of employees and corporations especially under flexible work systems Milkovich and Wigdor, 1991). It identifies an opportunity for the staff to develop because of improved linkage between individual performance and the rewards. The implementation of productivity-based pay system will offer job stability and limits the possibility of laying off the employees in the event of an economic down turn. At the firm level, there is an assurance of continuous improvement due to implementation of productivity and quality initiatives. Communication and cooperation between employers and the workforce will improve to a greater extent because these two parties work extra hard to enhance the performance of the organization (Perry, 1995). Rewards have been recognized as a powerful tool that is able to enhance the behaviours of employees thus leading to improvement of performance. Alternatively, the creative use of personalized non-monetary rewards is able to reinforce positive behaviours and improvement of employee retention and performance. Maire and Nick (2002) argue that compensation systems are able to provide legal compliance, labour cost control and anticipated fairness and equity towards the workforce and enhancement of the employee performance thus the firm is able to attain maximum level of productivity and customer satisfaction. Challenges/ negative impacts The introduction of performance-based pay system comes with lots of difficulties such as measurement problems, feedback and acceptance of the evaluation results by the top management, limited desirability of the merit reward scheme, system noise that could obscure the effort-reward linkage; for instance, the long time lapse between performance and rewards and furthermore the conflicting use of financial and non-financial rewards (Perry, 1995). The system is appropriate for positions in which the job responsibilities are a bit concrete and measurable. Some workforce often take this pay system as unfair due to low levels of organizational trust, inadequate transparency in the systems for employees and also the insufficient trust in performance-rating systems (Gabris & Ihrke, 2000). In some instances, inadequate performance appraisal systems can make the goals of the appraisal system not to match with the aims of the reward system. Again, some of the reward systems may not satisfy the objectives that are sought to be attained by the organization. These rewards may include satisfying distributive justice, changing organization culture and attracting and retained qualified personnel. There is a non-recognition that performance especially profit are often dependent on variables outside the control of employees such as management decisions, economic recessions and the exchange rates. Perry (2006) noted that financial rewards are not the most motivating factor since some of the financial results may have de-motivating consequence among the workforce. Performance-based pay system is a complex system that usually demands a huge investment in order to be implemented effectively and efficiently. However its effectiveness is undermined by major flaws in the design, implementation and operational stages. Due to the widespread employee concerns that deal with the procedural fairness of the system, the merit pay scheme has limited motivational effect (Perry, 1995). Constant favouritism has become the order of the day especially in the allocation of ratings with top management in the pay system thus increasing petty jealousies within the workforce. Alternatively, without any improvement in the employee perceptions of the procedural justice of pay systems, then this will have a detrimental impact on the employee morale and motivation in the workplace. Issues of performance ratings have deemed to demotivate rather than motivate the workforce especially if they are lower than the expectations (Perry, 1995). For instance, the procedures of annual performance appraisals have encouraged a focus on the short-term outcomes which could ultimately undermine teamwork and expand the unproductive forms of competition among the workforce (Gomez-Mejia, 1990). There is a potential to heighten the gender bias at the workplace due to reduced transparency of the pay structure and in some cases different classes of employees can be created which can entrenched the divisions in the workplace which could ultimately undermine the willingness of employees to cooperate with each other (Pfeffer,1998). For instance, this pay system has a potential to separate the workforce into two classes, ’stars’ and ‘rans’. Conclusion/Recommendation Performance-based pay system has proved to be a tool for achieving sustainable competitive advantage, a reflection of the norm of distributive justice and also as a practice that is in line with employee motivational theory such as expectancy theory and goal-setting theory. Adopting the use of merit plans need to be encouraged by many organizations. Crucial steps need to be taken to ensure that all the appraisal system is carried out in professional way. Source of funds should be committed to the training of managerial staff or assessors to limit the errors that are inherent with the staff assessment. There is a need to recognize the significance of enhancing productivity via wage systems that are linked to productivity and performance. Sufficient amount of information concerning how pay increase decisions are made is fundamental to the proper functioning of all pay systems. The need to give employees more incentive in order to give higher levels of effort, encourage more flexible working and teamwork and will also direct their efforts towards the achievement new goals and objectives. Work cited Armstrong, Michael, and Brown, Duncan. (1998). Relating competencies to pay: the UK experience, Compensation and Benefits Review, 30(3), 28-39. Gomez-Mejia, L. R. (1990). Increasing Productivity: Performance Appraisal and Reward Systems. Personnel Review 19, 2, 21-26 Lawler, E. E. (1985). The Effects of Performance of Job Satisfaction, Industrial Relations, Vol.7, pp20-28 Milkovich, G. T. and Wigdor, A. K, (1991). Pay for Performance: Evaluating Performance Appraisal and Merit Pay. Washington, DC: National Academy Press Milkovich, G.T., & Newman, J. M. (2002).Compensation (7th ed.). New York: McGraw-Hill, New York, NY. National Productivity Corporation, (2000).Handbook on Productivity Linked wage system, Malaysia Perry, J. L., Mesch, D., & Paaarlberg, L. (2006).Motivating Employees in a New Governance Era: the Performance Paradigm Revisited. Public Administration Review, Vol.66, pp.505-514 Seniority Versus Performance Based Pay Systems was retrieved on 17th February 2012 at http://www.degarmogroup.com/index.php/seniority-versus-performance-based-pay- systems/ Using Your Pay System to Improve Employees' Performance: How You Pay Makes a Difference was retrieved on 17th February 2012 at http://www.hotelschool.cornell.edu/research/chr/pubs/reports/abstract-14241.html Shaw, J. D., & Gupta, N. (2007). Pay system characteristics and quit patterns of good, average, and poor performers. Personnel Psychology, vol.60, pp.903-928. Pfeffer, J. (1998b).Six Dangerous Myths about Pay. Harvard Business Review, 76, 3, May – June: 109-19 Perry, J. (1995).Compensation, Merit Pay and Motivation. In S.W. Hays & R. C. Kearney (eds), Public Personnel Administration: Problems &Prospects, pp.104-115.New Jersey: Prentice Hall Swabe, A.I.R. (1989). Performance-related Pay: A case study. Employee Relations, 11(2):17-23. http://dx.doi.org/10.1108/EUM0000000001016 Pfeffer, J. (1995).Competitive advantage through people. Boston, MA: Harvard Business School. Read More