Performance-Based vs Skill-Based Payment Systems - Essay Example

Delivery of HR practices (staffing, development, compensation, labour relations, etc.) is based on professional and often research-based principles” (Boudreau, 2005). Employees are the main asset of every company, the managers should be aware of the latest theories in HR management and implement them efficiently.

Whereas there are several types of salary (fixed, performance-based, skill-based, etc.), each having its merits and demerits, the companies choose the one that corresponds ideally to the profession, style of work, and even personal traits of workers. It is a well-known phenomenon that whereas some categories of employees are motivated by high salaries, others prefer getting a compensation package rather than a big salary. For companies’ managers, it is often difficult to choose between offering their employees high salaries, on the one hand, and other benefits on the other. Let us therefore consider two types of payment and compensation packages, and how their use influences the performance of the employees.

Skill-based system of employees remuneration certainly has both advantages and disadvantages: on the one hand, it makes the task of calculating the payment for each worker easier for the company’s management and allows them to attract and retain highly skilled personnel, but on the other hand, it takes into account skills rather than actual performance and therefore people get more not because they work hard but because of their background. Sometimes employees with better skills perform worse than those who are less skilled, and in these cases, such a system of payment will affect the quality of work, lower employees’ motivation, and even destroy team spirit.

Yet, it may be argued that those who had been able to develop a certain amount of skills are those whose motivation and performance are high, and the system of skill-based payment works under the condition that certain rules are stuck to. First of all, it is crucial that the employees understand the way the payment is calculated, and are fully committed to the company so that there are no doubts as to its fair attitude to staff (Schuster, 1998).

Secondly, the company’s management has to make sure that the skills the workers acquire correspond to the company’s goals since it has been pinpointed that skill-based pay is likely to cause problems in cases when the skills acquired by the staff ‘become outdated or if the skills are not being used to the fullest by the company’ (Ashish et al, 2004). Therefore, the company should “reflect the button of an employee's learned skills to the achievement of company goals” (Fox, 2002).

Perhaps the main argument in favour of company’s using compensation packages is that this brings the employees to a considerable degree of commitment making them regard their company as stable, reliable, and caring about its staff’s wellbeing. Nowadays, practically any respectable company offers their staff compensation packages of some sort which may include bonuses, holding companies’ stocks, getting discounts, medical insurance, etc. (What does a total compensation package include, 2001; Compensation package, 2005; Evaluating the total compensation package, 2005). Free training and courses are also extremely motivating, especially for young employees (Heathfield, 1994).

The performance-based payment system is beneficial predominantly for active and highly motivated people able to work hard, as they can bring more profit to the company and at the same time benefit themselves. Implementing the performance-based development strategy might mean a lot for a company since it allows ‘to replace <…> traditional, static developmental approach with more flexible and dynamic responses’ (Cohen, 1991).

Boudreau introduces into HR the notion of “talents” that, he believes, is the same for HR as ‘marketing for sales’. Talentship inevitably presupposes performance-based staff management (Boudreau, 2005).

What is the essence of a performance-based system of remuneration? First of all, it ‘begins by looking at a [company’s] business expectations and its actual results’, and its effective implementation allows us to find out how to overcome ‘the gap between anticipated and actual business results’ (Greenstein et al, 1994). Performance-based payment is considered by the majority of researchers and practitioners to be the most effective for ensuring employees’ motivation.

When choosing a payment system, managers should take into account the individual peculiarities of workers as well as the specificity of the jobs performed. However, staff motivation can also be increased using offering compensation packages which also make people more committed to their employees.