The Implementation of Employee Compensation System in Organizations - Essay Example

Running Head: Implementation of employee compensation system in organizations By Name: Instructor: Module: Date: Introduction Performance in organizations is currently given top priority due to today’s turbulent workforce dynamics. Organizational performance helps in understanding of productivity in public/administrative and private/business sectors. To monitor performance, both macro and micro-oriented perspectives needs to be adopted. Employee performance can be rewarded in two different ways: pay for performance systems or incentive pay systems. In incentive based pay plans, the company rewards workers based on measurable work outcomes such as productivity or sales. While in pay for performance system, the company rewards individual performance as measured by a performance appraisal system. In this paper pay for performance is examined as an appraisal system that increases productivity in organizations as well as the challenges the system faces upon its implementation (Economic Research Institute, 2004). Background In the past two decades, Pay for performance (P4P), has generated interest among policy makers as a quality based initiative system aimed at encouragement and rewarding of workers. P4P as a motivator is perceived to be a unique system compared to other payment systems that do not promote or reward quality, but may otherwise reward poor performing workers or poor practices. As an example, the concept of aligning payment policy to quality improvement has gained support by a number of entities and institutions in America since 2001. This is upon realization by US organizations that they were in danger of losing out market share to foreign competition (Economic Research Institute, 2004). Pay for performance (P4P) Employee compensation, appraisal or rewards acts as a catalyst for performance improvement and thus increases productivity in organizations. However, rewards may have limited results since it cannot substitute good management practices, rather it compliments the later. If pay for performance (P4P) is to be effective, certain criteria must be followed, with the following essential elements; rewards should be fast, significant, with known goals which are understandable and attainable, rewards must be irrevocable, and must be directly and distinctively linked to performance and compatible to the job measurement. The essence of adhering to this criterion is to avoid depiction of P4P as being unrealistic and unfair or seen to promote favoritism or seniority. Because in this way P4P becomes a negative motivator, hence, a proper balance is attained by structuring P4P to serve as a motivator which optimizes productivity (see Figure 1) (Economic Research Institute, 2004). Figure 1 shows the balance in designing employee appraisal program Source: ERI Economic Research Institute. (2000-2004).Online Compensation & Benefits Education: pay for performance. The development and evaluation of P4P system is thus necessary for identification of appropriate system structure and components, including suitable measures, proper incentives, and linkages between performance and incentives. This is because incentive structures differs with each system and includes both financial and non-financial incentives (Peterson, et. al. 2006). However, there are a number of concerns which should be considered and accounted for while designing a P4P system (see figure 2). This is to take care of unintended consequences that may result. although, appropriate planning and monitoring may help to negate and alleviate some of these concerns, P4P design should strive to; 1.Ensure the appropriateness of incentives to reward quality for example by linking the measure and incentive to quality outcomes.2.Deter gaming of the system and adverse selection, as these may lead to decreased productivity and increased disparities, or impediments to organizational innovation plan. In this case measures and incentives will need to be monitored to avoid such consequences commonly found in incentive-systems.3. Avoid incentives that will only produce improvements in documentation rather than actual quality (Peterson, et. al. 2006). Figure 2 shows P4P appraisal criteria Source: ERI Economic Research Institute. (2000-2004).Online Compensation & Benefits Education: pay for performance. Types of P4P There are two types of pay for performance; these are Micro and Macro level appraisals. This draws from James Coleman’s and Peter Blau’s perspectives which link micro-level exchange processes to macro level institutional and organizational structures. According to Blau’s perspective, power inequalities which arise from imbalanced exchanges serve as a bridge for macro structures. Coleman’s hold the view that macro or meso level corporate actors are created intentionally in order to achieve goals which are either impossible or difficult for individuals to attain on their own. The reason is being, in daily life, observations show that certain people are known for being good team players and show concern to others welfare, while other individuals only seek to satisfy personal interests and needs without reckon of effects their actions cause to others (Johnson, 2008). As seen above, if the P4P will favor individuals then it serves as a potential source of conflicts in workplace based on rational choice theory. Thus P4P program must consider social dimensions and the outcomes which may have implications to employee identities and self-concepts. Therefore, material or non-material exchanges through the appraisal system must be balanced to escape the wrath of dependency and power differences (see Figure 3). The power and dependency relations emerge from imbalanced exchanges in a collective action within provision processes (Johnson, 2008). Figure 3 shows balanced P4P implementation. Generally, productivity in organizations is erroneously associated to the production/workshop floor. However, productivity is actually the ultimate determinant of profitability through sum total of productivity at all levels in the organization including the CEO. Integration of total team efforts into productivity is complimented by financial motivation through P4P. The financial rewards come in three types, profit sharing, merit rating and job evaluation (Medscape, 2004). Macro or micro-oriented perspectives play a major role in profit sharing where profits are distributed to entire company or a section or group handling specific product or activity. Job evaluation likewise involves consideration of different component factors such as working environment, mental characteristics, physical characteristics, extend of responsibility and experience or training in order to ascertain inter-job comparison as a basis of defining basic wage structure. Merit rating in contrast measures organizational performance in respect to employee attributes. Unfortunately such rating results to biases or the rater may be so lenient (Medscape, 2004). Challenges P4P program faces P4P program is faced with a number of challenges as follows; 1.The “Do Only What You Get Paid For” Syndrome which exists among workers is manifested if closer pay is tied to particular performance indicators, the more employees tend to focus on those indicators they neglect other important job components. 2. Negative Effects on the Spirit of Cooperation arises where employees withhold information from a colleague if believing that it will help the other person get ahead. 3. Lack of Control, this challenge affects employees thus they often cannot control all of the factors affecting their performance.4. Difficulties in Measuring Performance, Assessing employee performance is one of the thorniest tasks a manager faces, particularly when the assessments are used to dispense rewards (Medscape, 2004). 5. Psychological Contracts, Once implemented, a pay-for-performance system creates a psychological contract between the employee and firm, and it is very resistant to change.6.The Credibility Gap, employees often do not believe that pay-for-performance programs are fair or that they truly reward performance. 7. Job Dissatisfaction and Stress, Pay-for-performance systems may lead to greater productivity but lower job satisfaction.8. Potential Reduction of Intrinsic Drives, Pay-for-performance systems may push employees to the point of doing whatever it takes to get the promised monetary reward and in the process stifle their talents and creativity (Peterson, et. al., 2006). How Challenges facing P4P programs are resolved. The challenges in implementing P4P can be avoided by 1.Linking Pay and Performance Appropriately, There are few cases in which managers can justify paying workers according to a pre-established formula or measure.2.Use Pay for Performance as Part of a Broader HRM System, Pay-for-performance programs are not likely to achieve the desired results unless they are accompanied by complementary HRM programs.3.Build Employee Trust, Even the best conceived pay-for-performance program can fail if managers have a poor history of labor relations or if the organization has a cutthroat culture.4.Promote the Belief that Performance Makes a Difference, Unless an organization creates an atmosphere in which performance makes a difference, it may end up with a low-achievement organizational culture (Medscape, 2004). 5. Use Multiple Layers of Rewards; because all pay-for-performance systems have positive and negative features, providing different types of pay incentives for different work situations is likely to produce better results than relying on a single type of pay incentive.6. Increase Employee Involvement, when employees do not view a compensation program as legitimate, they will usually do whatever they can to subvert the system.7.Use Motivation and Nonfinancial Incentives, Some people are more interested in the nonfinancial aspects of their work (Peterson, et. al., 2006). Incontrast, despite P4P's obvious appeal, not all aspects of pay for performance are desirable. In the first place concentration on performance alone often leads to conflicts against the compensation goal of equity because if employees on pay-for-performance system are in the same working team or group performing similar duties yet earning greatly different pay rates, then feelings of inequity occurs in such situation, especially if the program is not properly designed as well as poor communication leading to wrong perception about performance as a proper variable for setting pay (Economic Research Institute, 2004). Secondly, pay-for-performance may not be desirable based on the above assertion, since the program explicitly or implicitly sets up worker into competition with each other. Yet what is needed is cooperation and team spirit in the organizational working units. In addition, differential pay may result to divisive effects leading to lowered production and not higher performance for the team or group as a whole. This actually explains why first-line supervisors are often not as enthusiastic about pay for performance as higher-level managers (Economic Research Institute, 2004).Thirdly, P4P may not be desirable since it chokes up administrative potential wasting managerial time and effort and hence must be designed and administered carefully. Forth and last reason for undesirability of P4p plan is the lack of trust, because, P4P often relies on the managers judgments on the level of performance of employees which is prone to personal interests and misjudgments(Economic Research Institute, 2004). There are there types of performance plans; Individual- based plan, Team- based plan, and Corporate Wide plan. A job-based pay plan policy tends to work best in situations where: Technology is stable, Jobs do not change often, employees do not need to cover for one another frequently, much training is required to learn a given job, turnover is relatively low, employees are expected to move up through the ranks over time, and where jobs are fairly standardized within the industry. The second plan, the Individual-based compensation programs is more suitable when: 1.The firm has a relatively educated workforce with both the ability and the willingness to learn different jobs.2 The Company’s technology and organizational structure change frequently.3. Employee participation and teamwork are encouraged throughout the organization.4.Opportunities for upward mobility is limited.5. Opportunities to learn new skills are present.6.The costs of employee turnover and absenteeism in terms of lost production is high (Peterson, et. al., 2006). Conclusion This paper has successfully defined and discussed pros and cons for Pay for performance. The program rewards employees performance within confines of given wage structure. However, the system requires a cautious approach since it is not often desirable or possible. The costs and merits for the program need careful consideration as well, with the objective of correlating worker’s position in the wage rate relative to their performance position scale. The P4P program on overall results to situation such as; employees whose wage rate is at the low end of the range and whose performance is high receive large increases, while those whose performance matches their place in the rate range receive average increases, and those whose performance falls below their place in the rate range receive no increase. However, initiation of proper evaluation system for performance as a variable in designing P4P, then organizations can easily avoid aspects that may lead to conflicts (Economic Research Institute, 2004). References ERI Economic Research Institute. (2000-2004).Online Compensation & Benefits Education: pay for performance. Retrieved January 13, 2010 from < http://www.eridlc.com/index.cfm?fuseaction=textbook.chpt17> Johnson, D.P. (2008).Contemporary Sociological Theory: An Integrated Multi-Level Approach. Springer Science + Business Media, LLC, pp 223 Medscape. (2004).Getting Rewards for your Results: Pay-for-Performance Programs: The Basics of Pay for Performance. Family Practice Management, 11(3). Retrieved January 13, 2010 from http://www.medscape.com/viewarticle/472584_2 Peterson, et. al. (2006). ‘Does Pay-for-Performance Improve the Quality of CARE?’ Annals of Internal Medicine, 145(4), 265-272. Read More