Pay Them by Their Performance and Everyone Benefits Statement - Coursework Example

Running Head: Pay by Performance Pay by Performance [Institute’s Pay by Performance “Pay them by their performance and everyonebenefits” is the most recent slogan of the proponents of performance related compensation. The concept of performance related pay is in the process of implementation at most organizations, and recently, even many governments throughout the developed world are beginning to endorse a performance based compensation system. Our focus is to determine the costs and benefits of the system and to compare it with other existing performance management systems. Here performance related pay is defined as, “Compensation contingent on performance that is awarded to individuals and/or groups either as permanent increments to base salary or as bonuses” (Perry, pp. 1-13, 2009). The theoretical concept of pay by performance exists since much earlier. New public management idea has been the basis for Congress reforms in the United States and the introduction of the Performance Management and Recognition System (PMRS) in 1984. This system was only in place until 1991 (Perry, pp. 1-13, 2009). However, to understand any system it is important to review the reasons for its failure. Criticism against the PMRs was that it had poor mechanisms to differentiate performance levels, also the funding was itself inadequate to sustain the program and it provided little means of monitoring and reporting the quantifiable benefits of the program. Above issues do not prove that a performance-based system is inappropriate for an economy. The criticisms generally discuss the shortcomings of the old system; they do not provide any empirical evidence against it. Extensive research on performance-based compensation is available to base a strong case for tying reward to performance. It comes to attention that the relationship between an employee and an employer is not exactly that of a trustee and beneficiary (Gabris, pp. 70-89, 1986). Rather, the relationship is more of a low trust principal agent type. A performance related compensation system can correct for this problem. Knowing that one will get a definite reward for working hard, there is no reason for inadequate performance. Modern human resource management systems therefore should focus on compensation systems that are effective, flexible, and fair. An effective system should improve performance as compensation increases, a flexible system should be able to provide for extra work when an employee tends to outperform and a fair system should benefit both the company and the employee reasonably. Many modern organizations especially those with a global presence have implemented the use of quantifiable performance based systems (Dunleavy & Hood, pp. 9-16, 1994). Each key employee produces a list of goals that are the target for the next period of performance evaluation. These targets are set in such a manner that they should not reflect qualitative statements, but instead they are to be quantifiable. This approach attempts to answer many of the shortcomings of the previous systems that based their very existence on qualitative factors. Therefore, the focus of performance management systems is to provide quantifiable results. This helps to evaluate performance levels and to calculate certain statistics. However, these systems have their own limitations. For example, in professions where performance is based on the turnover, it is not possible to separate the impact of changes easily in economic variables from the impact of increased performance levels. However, it is still possible to differentiate an average performer from an above average performer. Performance related pay is a derivation of expectancy and reinforcement theories. An employee should perform better if he expects a reward in return. Similarly, higher compensation for desirable behavior can alter the attitude to a certain aspect of work positively. This is the idea based on reinforcement theories, where higher compensation or bonuses lead to changing the behavior of an individual. According to research, at times performance related pay fails to bring about the desired intermediate changes in performance levels because employees often perceive certain rewards differently that what they aimed to achieve (Perry, pp. 1-13, 2009). For example, employee perception about increments is similar to general increases in salary. Similarly, a high bonus last year might not achieve better performance in the next year if the employee is not certain about the rewards. Therefore, adequate communication to employees regarding what proportion of their salary rewards compensation is necessary. It should be clear, it should be certain and it should be significant to motivate an individual, only then it would bring about a change in performance levels. It is clear that performance related pay has been more successful in lower levels of organizations where the job responsibilities are well defined and are not ambiguous. At higher levels of organization, duties are often less clear and often fail to achieve the desired results from performance related pay mechanisms (Dunleavy & Hood, pp. 9-16, 1994). Failure of performance related pay structure in public sector is due to the inefficiencies and structural differences of the public and private sectors. These differences come into play while determining the success of any compensation system. However, implementation breakdowns are not the only reasons for the failure of a pay by performance system. Institutional differences such as lack of transparency and budget constraints are the real reasons for limits on the success of this system in the public sector (Perry, pp. 1-13, 2009). It is important to note that most private organizations have been able to quantify the success of a pay by performance structure. The use of expectancy theories and reinforcement theories does not seem appropriate in the case of public sector. Therefore, when implementing a performance-based system in public sector other sources of motivation such as public service motivation theory and self-determination theories are also important determinants of success of the system in future. Studies have also predicted that external control imposed on employees can at times have an opposite effect on motivation of employees. In certain cases, an employee is motivated only if he has substantial control over his work and surroundings (Deci and Ryan, pp.28-42, 2004). To correct for this problem private organizations have implemented systems where the employee has control over his own situation. For example, at the beginning of each year the employee sets his own targets for the coming year, along with reaching common goals through meetings with his supervisor. This aligns the targets of the firm with the goals of an employee and can act as a motivating force improving employee performance. Another important thing is to remember that each organization is different and has its own unique circumstances. When planning to introduce a performance related pay system, an organization should not simply replicate the conventional systems. Rather, it should consider its unique circumstances and adapt to the system in such a way that it can overcome its shortcomings. Hence, customizing performance related systems is a major factor determining the success of the system itself. Research on ways to improve the performance related pay system is still undergoing. It is important to have a strong focus on developing research and models that are more empirically able to quantify the results of such a system (Dunleavy & Hood, pp. 9-16, 1994). The agenda for research should find out the relationship between performance increases in salary and increments on base pay. It is so far not possible for employees to distinguish between the two. Also, impacts of the use of group incentives is not yet clear and further research should help clarify these issues. Employee job satisfaction is an important factor that determines the success of any compensation system. Motivation need not only come from compensation, other factors that determine success of a program do exist. An employee working for one of the top most firms in his relevant industry has higher level of job satisfaction as he considers himself more successful in general even if his salary is very similar to another individual working for a smaller firm (Artz, pp. 315-343, 2008). Therefore, it is important to find the source of motivation for individuals and to develop systems that are most efficient in allocating motivational resources. It is also possible that an individual working for a smaller size firm is more motivated to work hard compared to another working for a large firm. The sources of motivation could be the high level of responsibility attached to the position or direct interaction possibilities with higher management. This could make an employee feel as part of a larger family and to perform better based on non-compensation related motivational factors. Incentive pay is generally for specified performance results rather than the amount of time spent on a job. This motivates an employee to perform better and to do more in a given time, and helps individuals with a tendency to slow down their work to perform appropriately (Artz, pp. 315-343, 2008). This method can be a source of de-motivation for employees who are slow or have already reached their maximum potential. However, it seems fair to be able to distinguish high performers from average performers and further responsibilities depend on results. Performance based pay system can be aggressive and they can lead to excessive competition between employees. In most cases, this zest for competing each other is appreciated, and can create value; however, if individuals within a team are competing against each other this can be counteractive. Therefore, any compensation system based on performance must consider what creates value and what destroys value in determining the success of the system. Recently, many organizations have started using casual incentives in order to motivate employees. Casual incentives include thank-you notes, a casual dinner or a one-time performance bonus or lump sum amount in order to appreciate the work done (Gabris, pp. 70-89, 1986). Employees receive performance awards and are entertained through providing them with tickets to shows or other activities. A regular bonus entitlement becomes a part of the regular expected income of an employee in his perception; therefore, a lump sum bonus or surprise bonus technique is more applicable to create incentive to perform better. A major drawback of this system is that other employees might consider this as favoritism on part of the supervisor and bias towards certain employees. Structured incentives on the other hand can help direct employee efforts. These incentives could improve the quantity of work performed by employees; however, they do not guarantee that the quality level will be sustainable (Andersen & Pallesen, pp. 28-47, 2008). Many employees might compromise on the quality of work to be more done, in order to be better rewarded for their work. However, proper quality control systems in organizations can correct for this problem in an efficient manner. A proper design and implementation mechanism provides for structural incentives to work well and produce desirable results. It is important to follow certain step when designing a structured incentive system. One must analyze the change in performance levels that is attributable to the introduction of a structured incentive system. There has to be a direct linkage between the performance and pay, any breakdown in the linkage can create mixed signals and produce counteractive results. Before implementation of such a system, it is important to identify and objectively report all possible loopholes. Standards and quality of performance are then established and pay is determined consequently. It is also desirable to protect employees from any negative consequences that could de-motivate the workforce (Gaertner, Gaertner, & Akinnusi, pp. 525-543, 1984). Once the system is ready for implementation, adequate communication of the purpose served by the system is necessary to avoid any confusion. Finally, a periodic and effective monitoring is required to record improvements in performance. Performance related pay has the potential to increase employee satisfaction and productivity if the design is appropriate and if regularly maintained. Employees know that attention to detail and increased productivity may result in casual incentives due to their inexact timing and unexpected nature they are complemented with other incentives to be effective. It is clear that performance related pay systems are appropriate to determine earnings. However, due to certain limitations their successful implementation depends on the organizational culture and institutional adaptability to these systems. Such systems cannot work in isolation and the best approach is to blend them with a time-based pay. Therefore, a base salary complemented with performance-based pay is probably the best solution to determine compensation for employees. References Andersen, Lotte B., and Pallesen, Thomas. (2008). “Not Just for the Money? How Financial Incentives Affect the Number of Publications at Danish Research Institutions.” Artz, B. (2008). ‘The Role of Firm Size and Performance Pay in Determining Employee Job Satisfaction Brief: Performance Pay, and Job Satisfaction’, Labour Journal. Volume 22, pp. 315-343. Deci, Edward L., and Ryan, Richard M. (2004). Handbook of Self-Determination Research, University of Rochester Press. Dunleavy, Patrick, and Hood, Christopher. (1994). ‘From Old Public Administration to New Public Management’. Journal of Public Management and Money. Volume 14, pp. 9-16. Gabris, Gerald T. (1986). ‘Can Merit Pay Systems Avoid Creating Discord between Supervisors and Subordinates? Another Uneasy Look at Performance Appraisal’. Review of Public Personnel Administration. Volume 7, pp. 70-89. Gaertner, Gregory H., Gaertner, Karen, N., and Akinnusi, David, M. (1984). ‘Environment, Strategy, and the Implementation of Administrative Change: The Case of Civil Service Reform’. Academy of Management Journal. Volume 27, pp. 525-543. International Public Management Journal. Volume 11, pp. 28-47. Perry, James. (2009). “Back to future? Performance related pay, empirical research and the perils of persistence.” Public Administration Review. Volume 69, pp. 1-13. Read More