Effectiveness of Performance Related Pay and Reward System - Essay Example

People come to work for money; it is the reason why every payment increase is highly appreciated by employees. Managers struggle to develop a unique system of pay and rewards to keep employees satisfied with their compensation and retain them in the organization longer. Pay and rewards serve as the main incentives for people at work. Moreover, performance-based pay and reward system pay attention to the contribution of each employee and rewards them accordingly. In most cases, if people are not satisfied with their compensation, they lose motivation to work and search for another employer who offers better work conditions. It is the reason why reward management is critical for any organization.

According to Shields (2007), the main purpose of reward management is to attract new talents, retain experienced employees and motivate all of them to work. There is a wide range of criteria applied to reward system assessment in each organization. Shields states that it must be need-fulfilling, legal, cost-effective, strategically aligned, affordable, and felt fair. If the reward system corresponds to all these criteria, it serves as a work incentive and motivates employees to perform better. Performance-based pay and reward system meets the criteria mentioned above because it estimates each employee individually and in a group finding the right way to appraise the hard work of everyone.

To boost performance in teams, the system of pay and rewards has to consider individual performance and teamwork as well. If teamwork is not considered an important factor, people tend to focus on personal achievement and they start competing with their co-workers instead of cooperating with them. According to Heneman and Von Hippl (1995), it is critical to have a group-based reward system or team-based pay to foster cooperation between employees and boost their performance as a team.

An effective system of payment and rewards does not mean that employees in an organization have bigger salaries. According to Marsden (2003), over-compensation is bad for performance as it usually takes place in poorly managed firms where employers try to "buy" loyalty from their employees. Contrary to them, organizations with the best performance have above-average demands on their employees but all extra loads are considered when it comes to appraisal. In the tax service example mentioned by Marsden (2003), it is clear that managers use appraisals as a tool to control employees' performance. The decline in basic salary and additional bonuses for extra performance positively influenced employees in terms of work productivity (Marsden, 2003).

Heneman and Von Hippl (1995) suggest that individual pay increases for outperforming employees and a team-based system of rewards together have a positive impact on work performance. Moreover, the performance-based pay and reward system is flexible enough to meet the demands of each employee and assess their work progressively.
All advantages of the performance-based pay and reward system prove that it is an effective method of performance management. All employees can get what they deserve and managers can make changes to their system to motivate their employees better. Overall, many employers choose this system of pay and reward because it is proven to be effective in the most successful organizations in the world. Read More