Pay for Performance: What Does the Research Say and Does It Work - Literature review Example

Pay for Performance: What does the research say and does it work? Widespread complexities and dynamism caused by unpredictable and competitive markets constitute the primary features of the modern business environment. Human resource management practices are shifting focus from conventional methods to adopting practices suitable for markets that are characterized by cutthroat competition. Pay for performance is one of the approaches adopted by managers for effective management of the workforce. Human resource managers applying pay for performance approach compensates workers for meeting certain pre-established measures of quality and efficiency. According to Bayo- moriones, Enrique & Martinez- DE- Morentin (2013), pay for performance is largely considered the best approach for improving the organizational outcomes by enhancing employee motivation and ensuring identification with the objectives of the enterprise. The approach of pay for performance concentrates on compensating workers for what they have done as opposed to extending payments without considering an employee’s contribution to the value of the firm. Despite a few challenges facing the system of pay for performance, the approach can work excellently to enhance worker productivity and efficiency. Larkin, Pierce and Gino (2012) recognize that compensation is a critical component of organizational strategy since it influences firm performance by motivating employee effort in addition to attracting and retaining exceptional workforce. The primary purpose of this research is to determine the suitability of pay for performance method of compensating workers. The researcher intends to contribute to the analysis of the use of pay for performance systems as one of the best approaches for enhancing flexibility within the firm’s reward system. Secondly, the research will focus on identifying the effects of pay for performance system in employee motivation and retention. Firms seek to attract the most experienced workers, hire them, and retain them because they believe that skills, knowledge, and experience constitute the best inputs in ensuring quality productivity. Proper understanding of pay for performance system is vital for human resource managers. Human resource managers are interested in comprehending proper processes of using this system, difficulties encountered in its use and best approaches for overcoming the difficulties. The probability of success is in organizations is minimal in cases where the human resource managers do not have clear understanding of compensations methods. The modern business contexts are rapidly changing, which necessitates adopting effective ways of managing employees for improved performance. Additionally, human resource managers need to comprehend the goals of pay for performance as pertains to improving the transparency and accountability of organizational processes (Bayo- moriones, Enrique & Martinez- DE- Morentin, 2013). It is, hence, necessary to carry out a research to find out the extent to which pay for performance will help improve the efficiency and productivity of the human resources. The research will consider the effectiveness of pay for performance on both individual and team-based compensation. This will be determined by collecting and analyzing data from both small and medium-scale enterprises. Some organizations prefer using team-based compensation strategies to individual compensations schemes. Team-based compensation involve human resource managers tying a portion of employees’ wages or bonuses to the success of group goals; all members of the team receive similar incentive pay. The study will focus on both male and female aged between eighteen and fifty-five years old; these ages represent the working class citizens. The researcher will study the effects of pay for performance among both employees and employers in order to come up with a balanced opinion. Firms seeking prosperity must institute proper approaches for motivating top performance, attracting the best employees, and retaining them. These firms need to focus on business incentive plans, individual performance plans, and other awards (Larkin, Pierce & Gino, 2012). Using integrated compensation systems can be very effective in terms of reinforcing worker performance as well as less costly compared to other methods of motivation. Literature on the diffusion of pay for performance exhibits scarcity across occupations; however, insight into human resource practices can be gained through examining the related bodies of research. Most theoretical approaches to human resource management suggest that application of work practices is applied uniformly to the entire labor force within the firm. According to Bayo- moriones, Enrique & Martinez- DE- Morentin (2013), the best way is the best practices approach that defends the universality high employee involvement in management decision making. The agency theory holds that there are two alternatives for setting compensation: pay for performance and paying a flat rate. Larkin, Pierce and Gino (2012) assert that most firms pay for performance based on some observed output of the employee; however, firms can still pay on subjective measures not dependent on observable output. Landsberg (2009) argues that employees can work harder when their pay is based on performance than when the firms pay a flat rate. Piece rate earnings for an employee is determined by the amount of effort and time the employer puts into their work; more time and effort implies higher payments compared to less time and effort. Pay for performance is a vital system of payment when firms do not have complete information concerning actual employee effort. Applying pay for performance requires thorough understanding of employees including their knowledge, skills, experience, efforts in production and actual productivity. When human resource managers do not have clear information concerning these variables, applicability of pay for performance looses meaning in business contexts. The extrinsic motivation to earn high pays acts as a driving force behind the employee working hard. Firms ought to pay employees a premium for taking on any risk in pay uncertainty because employees are risk averse. Human capital theory has gained widespread popularity and has become a dominant means of wage determination. Landsberg (2009) posits that earnings in the labor market are contingent upon the skills and knowledge of the employees. Human capital constitutes a stock of competencies, habits, personality attributes, and knowledge embodied in the ability to perform labor in order to produce economic value. The accumulation of human capital takes a long period of time to achieve, although some people can work without having to attend formal education. According to Kim, Sutton & Gong (2013), people who have accumulated more human capital than others should be rewarded higher than those who have just little of it. Education, skills, and experience are the primary measures of the amount of human capital an employee has acquired. This implies that employees should be paid according to their experience, knowledge, and skills. Employers believe that human capital determines employee productivity; hence, people should be rewarded in accordance to their productivity. Larkin, Pierce and Gino (2012) criticized the idea of overdependence of knowledge, skills, and experience for setting the price to be paid to employees. The amount of knowledge a person has does not determine their productivity. Larkin, Pierce and Gino (2012) further argued that a person can be highly educated, but does not have passion for the work assigned. This will lead to reduced and poor quality productivity. On the other hand, a person without any knowledge, but having passion for the work has the potential for high quality performance. Therefore, the employers should purely determine salaries based on the worker’s output as opposed to credentials. Larkin, Pierce and Gino (2012) posit that companies that have not yet differentiated their pay based on performance could be losing out on the firm’s competitive advantage. Weak performers are usually are uncomfortable working in companies that differentiates some rewards for high performances; this explains the reason for high employee turnover in certain organizations. According to Kim, Sutton & Gong (2013), competitive advantage constitutes both internal and external aspects of a firm that enables it to maintain sustainability in the face of intensive competition. Among these aspects, include flexibility and efficiency among the management and the workforce. Kim, Sutton & Gong (2013) assert that pay for payment is the best approach for ensuring flexibility within the firm operations. Efficiency arises from the ability of the employees to perform tasks within the budget with the primary objective of cost minimization. Landsberg (2009) defined the pre-established measures for quality; they include effective material utilization and waste prevention. According to Larkin, Pierce and Gino (2012), an effective pay for performance design constitutes merit increases, short and long-term incentives, providing hiring guidelines, and promotions. Kim, Sutton and Gong (2013) defines merit increases as the payments that are advanced to employees for exceptional performance. The hiring guidelines, according to Larkin, Pierce and Gino (2012), acts as execution process; the execution process is just as critical as the design itself, and sometimes even more important than the design. Therefore, making sure that the company is clear in terms of the firm’s commitment and creating awareness of the of the consequences of not achieving the pre-determined standards constitutes the critical component of hiring guidelines. Firms that extend both long-term and short-term incentives to employees do it based on certain pre-determined criterion; therefore, this amounts to pay for performance because employees must achieve an established level of performance for the company to consider them for incentives. Pay for performance, however, is faced with various difficulties. First, managers may lack skills for effectively rating employee performance (Landsberg, 2009). This could lead to biasness in appraisals due to lack of objective bases for pay for performance compensations. Second, reduced salary budgets hinder the process of differentiating pay for performance across time. Despite overall budgets remaining smaller, the allocations for performance may be held constant because the message remains the same regardless of the amount of money paid. Third, it is difficult to choose proper benchmarks for determining standards for pay for performance (Landsberg, 2009). Companies find it difficult to determine bases for determining the required output for one to be rewarded. However, these difficulties do not wholly prevent pay for performance from working for the best outcomes of firms because human resource managers are always dedicated towards finding proper methods of overcoming challenges in their management processes. Given the critical effects of compensation for both employee behavior and firm performance, it is necessary for human resource managers to comprehend the factors to consider when designing the compensation systems for their firms. Pay for performance is based on compensating workers after achieving an established level of productivity. Financial rewards are dynamic due to changing business environment that could undermine the ability of the firm to inspire trust and commitment among the employees (Landsberg, 2009). Human resource managers should compile accurate data about the workers if they are determined to transform the pay for performance system into a reality. The pay for performance needs to be top-down and cyclic. Research on pay for performance is necessary because human resource managers need to comprehend the critical aspects of effective compensation approaches to enhance productivity. Pay for performance, if correctly applied in firms, can lead to worker motivation, improved productivity, efficiency, and effectiveness in resource utilization. References Bayo- moriones, A., Enrique Galdon- Sanchez, J., & Martinez- DE- Morentin, S. (2013). The Diffusion of Pay For Performance Across Occupations. Industrial & Labor Relations Review, 66(5), 1115-1148 Ken, A. (2013). Consultant Details Advantages of Pay for Performance. Report on Salary Surveys, 20(10), 8-9. Kim, H., Sutton, K., & Gong, Y. (2013). Group-based pay-for-performance plans and firm performance: The moderating role of empowerment practices. Asia Pacific Journal Of Management, 30(1), 31-52 Landsberg, R. D. (2009). How to Make Pay for Performance Pay Off. Journal Of Financial Service Professionals, 63(6), 12-13. Larkin, I., Pierce, L., & Gino, F. (2012). The psychological costs of pay-for-performance: Implications for the strategic compensation of employees. Strategic Management Journal, 33(10), 1194-1214. Read More