Performance-related Pay - Report Example

Performance-related Pay Executive Summary The purpose of this report was to analyse the issues of changing the organisation’s reward structure by introducing performance related pay. This report has reflected on the benefits that accrue to a business which implements performance related pay as opposed to fixed-rate salaries. Fixed-rate salaries does not motivate staff to work harder as the success will not be linked to them directly but in performance related pay, harder work translates into higher pay and low achievements, low pay. Performance related pay is linked to expectancy theory where the pay of a worker is directly correlated to the effort put towards the achievement of the final objectives of the company. Rewards for the performance of the workers is measured through individuals based performance which is rewarded based on performance, business results in form of profits and in terms of team performance which is rewarded on team based schemes. After analysing the benefits, implications and the cost involved in implementing the Performance related pay, it is recommended that this reward structure will be very suitable for this company. Table of content Executive Summary Table of contents 1. Introduction 1.1 Purpose 1.2 Scope 1.3 Method 1.4 Limitations 1.5 Assumptions 2. Findings 2.1 Justifications of a performance-related pay 2.2 Benefits of performance related pay 3. Conclusion 4. Recommendations 5. Bibliography 6. Appendix 1: Magnus Company 1. Introduction 1.1 Purpose The purpose of this report was to analyse the issues of changing the organisation’s reward structure by introducing performance related pay. 1.2 Scope While considering their benefits, it was important to consider their suitability and applicability in the organisation in alignment with the corporate standards, benefits and considerable warranties. 1.3 Method The information that was collected in this report came from consultation with the members of the staff, analysing the needs of the company and analysing Magnus Company (appendix 1) which is under analysis in this study. The company presented the successes of performance related pay which we are considering to implementing in our company. 1.4 Limitations We did not have many companies to consider in our application since this reward system is mostly used in private sector. Additional information of this study is not easy to access. 1.5 Assumptions As the review of the company’s staff revealed that there will be less resistance to change, this study assumes that many workers will be okay with the coming changes. This report assumes that the companies reward systems will be compatible with the new reward system so as not to change everything from scratch. 2. Findings Performance-related pay is a type of reward structure in which remuneration of a worker is directly linked to their assessed performance individually which is measured against some set objectives agreed at the time of inception of this method. The pay of a worker increases as the set achievements are met or even exceeded. In most cases, Performance-related pays consolidated into the basic pay. 2.1 Justifications of a performance-related pay The rationale for companies using performance-related pay is based on the expected positive results which will be preferred by both the company and the employees as both of them influence the performance of the company. Based on our company, the following are some of the rationale that will guide us in implementation of this remuneration method. 1. Performance-related pay is implemented by organisation to encourage high performance by the employees. Pay enhancements is an incentive to many workers who would work hard to increase their pay while at the same time improve the output of the company. 2. This reward system sets a culture of high performance in an organisation. 3. Performance-related pay promotes the concept of equity and fairness. Employees are paid for what they have achieved. This rationale is consistent with the equity theory where it is fair that those who have worked hard are paid more than the low achievers. 2.2 Benefits of performance related pay This remuneration method has a lot of advantages to both an organisation and the workers. Some of benefits which could be very helpful in this organisation include; i. Motivation of worker; monetary incentives is mostly a motivation to the workers. ii. Promoting a spirit of change; workers will have to work hard to prove their worth and increase their pay. iii. Directly leads to high results; by linking pay to performance, the workers are obliged to work to perform as seen in the expectancy theory. iv. Promotion of the spirit of performance; durability of the method instils a performance culture in an organisation which leads to the achievement of the companies goals as in the goal theory of performance related pay. v. Attracts and retains employees; enthusiastic workers will be attracted to this method as they are rewarded for their personal hard work. vi. It’s consistent with Maslow’s hierarchy of needs as its meets the basic need of reward after achievement thus fulfilling human needs. vii. Increases the flexibility of the company as it is able to retain the performing workers and lay off the non-performing one in case of a crisis without causing major inconvenience in the company. Magnus Company has been very successful in the implementation of performance related pay. With only three years into this method, they have increased their profits tremendously and employee motivation is expressly manifested. If we implement this method, there will be changes in the attendance of workers who come to work late, going on long breaks, non-performance, absenteeism and management will not be bothered by following workers as they already know what is expected of them. On the contrary, the poor performance and losses will continue to be experienced if this report is not considered seriously. 3. Conclusion The implementation of the performance related pay is guided by the achievement of the organisation’s goals. The company can spend lots money paying demotivated workers for doing nothing while the company is making loses. This method of remuneration proposes that workers be paid for the output in the success of the company. Measures are set upon which performance is assessed against. This serves as the framework upon which employees will receive their pay. In most companies, this pay is collaborated with the basic pay. The higher the performance, the higher the pay of the worker which instils the culture of high performance, this method also promote the awareness of the workers in terms of the objectives, vision and mission of the company. 4. Recommendations After analysis of the benefits that this method of remuneration will yield to our company, I recommend that this system be implemented as soon as possible. The first steps will be to harmonize the old system of payment so that it is compatible with the performance-related pay. The next step will be formulation of the measures and criteria for which the performance will be evaluated. After the end of the performance cycle, the results are measured by the set standards. Communication should also be enhanced to reduce the possibility of resistance. 5. Bibliography Armstrong, M., 2007. Armstrong’s Handbook of Reward Management Practice (3rd edn) London, Kogan. Bratton, J. & Gold, J., 2007. Human Resource Management – theory and practice (4th edn) Basingstoke Palgrave Macmillan Farmer, M. & Yellowley, W., 2012, Managing People (1st edition) Harlow, Pearson. Marsden, D., 2009. The paradox of performance related pay systems: why do we keep adopting them in the face of evidence that they fail to motivate? CEP Discussion Paper,  946. London: London School of Economics, Centre for Economic Performance. Mullins, L., 2009, Management and Organisational Behaviour (9edition) Harlow, FT Prentice Hall Pilbeam, S. & Corbridge, M., 2010. People Resourcing and Talent Planning – HRM in Practice (4th edn) London FT Prentice Hall Torrington D, Hall L and Taylor S (2005) Human Resource Management (6th edn) London, FT Prentice Hall Wright, A., 2004, Reward Management in Context, London, CIPD 6. Appendix 1: Magnus Company This company is our reference company in the implementation of this remuneration method. It had previously been under a lot of challenges which were solved by performance-related pay. Such problems were exactly what our company is facing and thus it will be our role model in the implementation of performance-related pay. Read More