Disadvantages of Performance-related Pay outweigh its Advantages - Essay Example

Disadvantages of Performance-related Pay outweigh its Advantages Roll No: Teacher: 8th December 2008 Table of Contents Table of Contents 2 Disadvantages of Performance-related Pay outweigh its Advantages 3 Introduction 3 Forms of Performance related Pay 4 Performance related Pay 5 Advantages and Disadvantages of Performance related Pay 7 Conclusion 10 References 11 Disadvantages of Performance-related Pay outweigh its Advantages Introduction ‘Performance-related pay comes in several forms but, in each case, their disadvantages as a system of reward outweigh their advantages’. Performance-related pay is a kind of pay that is provided to an employee on the basis of his/her performance at working (Booth and Frank 1999). Performance related pay is considered effective and promotional on one side and is considered disadvantageous on other side. The disadvantages associated to the performance related pay are so strong that advantages of this methodology are undervalued. Critics have analyzed performance-related pay differently, as many of the writers in various articles indicate that performance-related pay is a fruitful payment method due to which, there is more competition for positive working and people are more motivated towards effective task performance. On the other hand, there are also writers that have written articles negating the effectiveness of performance-related pay. According to the writers that are against the adoption of method of payment on the basis of basis, the payments are given to only those employees that are able to be close to the administration or management and that the pay is not given to them because of their effective working but on the basis of favouritism. Performance-related pay can have a positive as well as negative impact in various workplace environments. This paper discusses that performance related pay has many advantages but the disadvantages associated to it are overwhelming and devalue this mode of payment. The various forms of performance related pay are described after which, some authorial opinions are analyzed in terms of performance related pay and its effects. The advantages and disadvantages of performance related pay are analyzed and it is discussed that disadvantages outweigh advantages of performance related pay. In the end, the topic is concluded. Forms of Performance related Pay The performance related pay comes in several forms such as piecework, payment by results, plant and organization wide incentives, merit pay, performance related pay, competence based pay and profit related pay. Piecework is a form of payment related pay in which, the payee is paid on the bases of each and every task that he/she performs. For each and every task, a separate chunked pay is given to the employee (Courty and Marschke 2001). Payment by results is the bonus pay that is given to the employees on individual basis or on group basis. The employees are assessed against their performance in a particular time period after which, they get bonuses in form of payment by results (Marsden and French 1998). Plant and organization wide incentives are such bonuses or earnings that are given to employees according to the standard and level of the plant or organization to which, people are associated. Incentives are given to employees on the basis of performance of the whole entity. Merit pay is a form of performance related pay in which the employees performance is appraised and they are awarded likewise for their performance. This payment is wholly meritorious because employees’ contribution in terms of an overall success of the employer is judged (Prentice, et. al 2007). Performance related pay is provided to employees on the basis of their performance against the set objectives of the employer. The employees get paid according to the criteria of performance related pay by their appraisal of task completion in association with the mission of the organization or company (Booth and Frank 1999). Competence based pay is provided to employees on the basis of their competence or certain skills. For competence based pay, employees get training for certain skills. Profit related pay is a pay that is provided to employees on the basis of profit earned by the employer. The whole performance of organization is assessed to give profit related pay to the employees (Marsden and French 1998). Performance related Pay Performance related pay is provided to employees on the basis of their performance associated to their work. The employees are assessed or appraised against their performance to make sure to pay according to their performance (Marsden and French 1998). The organizations or workplaces that have opted for performance related pay to their employees assess the performance of their employees at the end of every month and this assessment results in some payment that is provided to a certain employee (Courty and Marschke 2001). Sometimes performance related pay is advantageous while other times it appears disadvantageous. Some workplaces are suitable for performance related pay but other places are quite unsuitable. In the article, “What makes performance related pay work?” Kauhanen and Piekkola (2006) made use of a Finnish survey form in order to gain the knowledge about the impacts of performance-related pay. According to their survey, the performance-related pay should be motivational for the employees so that they can come up with good results by considering the payment mode as effective and fruitful. Their survey concludes that the employees should be confident enough in order to check their effectiveness with the organization with which they are working. The employees should gain the knowledge that whatever they are doing for their organization or company is giving them a positive feedback. If the employees are doing more hard work, they should be paid accordingly and they have a negative performance, they must face negative consequences in form of low pay (Kauhanen and Piekkola 2006). According to Kauhanen and Piekkola (2006), the employees should have a full knowledge about the evaluation strategies of the administration or management or the standard of performance assessment should be close to employee’s understanding. When the evaluation strategies are known to the employees and when they are closer to the understanding of the employees, the motivational factor works more positively, as the employees are themselves able to calculate their performance with the payment, they are going to receive. When an employer is making use of the method of performance-related pay, he/she must make sure that the pays are kept high along with the fringe benefits that are offered to the employees. As far as those employees are concerned that come up with low performance, they should be dealt accordingly (Kauhanen and Piekkola 2006). The administration should make sure that they are involving the employees in constructing the format and criteria of performance-related pay. Kauhanen and Piekkola (2006) analyze the impacts of performance-related pay and recommended about various options that the administration or management can adopt in order to have positive impacts of performance-related pay. According to Kauhanen and Piekkola (2006), performance-related pay is an effective method of payment, as employees are motivated through this system to work more effectively. “Performance pay in the public sector: a review of the issues and evidence” by Prentice, Burgess and Propper (2007) is a review that analyzes the role of an individual in public sector. According to the writers, to analyze the role of an individual in public sector is quite a difficult task, as in public sector, employees work with a different format. According to Prentice, Burgess and Propper (2007), performance-related pay is not successful in public sector because of smaller incentives and inappropriate evaluation. Moreover, the criterion of assessment is unknown to employees and is also harder as compared to other workplace environments. In public sector, the amount for performance-related pay is fixed to a certain amount due to which, the workers showing extraordinary performance in work receive less incentives. The performance-related pay at a public sector has no positive impact, as the strategies adopted there to evaluate the performance of employees are based on favouritism, due to which the employees’ performance in place of becoming better is worsened (Prentice, et.al 2007). Because of the enlargement of the sector, the employees are unable to reach top management for the resolution of their problems concerning pay. The review was based on a survey form that is a method quantitative research and the results indicate that the performance-related pay is not fruitful in public sector (Prentice, et. al 2007). Advantages and Disadvantages of Performance related Pay With every mode of payment, there are associated advantages and disadvantages. Performance related pay has many advantages and disadvantages but these disadvantages are so much outweighing that advantages of this methodology can be neglected. The advantages of performance related pay are widespread. According to the practitioners of performance related pay, this methodology is widely productive because the employees try to compete each other for obtainment of a high pay (Courty and Marschke 2001). It is also reported that with high pays, the employees are motivated to perform better and better every time. Performance related pay facilitates the employees with opportunities to perform better and there is a source of competition. The employees are persuaded to perform better so that they can get higher pays for their task performance. Impacts of performance-related pay are motivation of employees, better performance of tasks, good earning, autonomy of workers, productivity and development of a positive relationship between the employees and employers (Kauhanen and Piekkola 2006). With the help of adoption of performance related pay as a methodology, the employer facilitates his/her employees a chance to earn better than the fixed pay receivers. The workers also enjoy a sort of autonomy because they are not restricted to be available at all times (Courty and Marschke 2001). They can do their jobs or tasks according to their own convenience. It is also informed that the payee of performance related pay play and effective role in the productivity of the workplace as a whole. Researchers also inform that performance related pay results in the formation of a positive relationship between employee and the employer. Both of the individuals are attached in an advantageous relationship that is a source of benefit for the two (Courty and Marschke 2001). Employee performs well and gets paid accordingly and employer gets what he wants and the employees’ performance facilitates in the establishment of the employer. There are a number of disadvantages associated to the methodology of performance related pay. The employees get no payment for their holidays or their being absent from their jobs which can be considered as a disadvantageous feature as the employees that are appointed on fixed pay do not face any such problem because of their being on fixed pays (Prentice, et. al 2007). Therefore, absenteeism can be counted as disadvantageous for the workers who work with the payment mode of performance related pay. Employees who have to work according to the performance related methodology have to work more as compared to fixed pay receivers. An employee who receives payment on fixed basis have a fixed amount of work to perform while an employee who works with the methodology of performance related pay have to do more work to get a higher pay (Courty and Marschke 2001). Therefore, task performance differs for both kinds of workers due to which, the persons getting pay with performance related mode are at disadvantage. A disadvantage that is associated to the receiving of performance related pay is that the management is sometime involved in discrimination due to which, the employees who receive performance related pay are unable to get their due rights (Booth and Frank 1999). The fact of discrimination is enough demoralizing for the workers due to which, their performance as a whole gets affected. Favouritism is also a factor that makes some employees to get higher performance related pays while others are deprived of their due rights (Marsden and French 1998). In some places, the payments attached to be payable on the basis of performance are very meagre due to which, employees get no motivation and go through a situation of deprivation. Motivation is not only given by means of extra pay but through respect and encouragement also (Courty and Marschke 2001). The management is responsible for facilitating the workers with proper encouragement and motivation. With performance related pay, a negative competition or a reason of conflict is there due to which, there can be problems in a workplace (Booth and Frank 1999). People can do such acts that can impact the performances of other members negatively. In most of cases the employees are not aware of the criteria according to which, their performance is assessed. This fact can be regarded as a disadvantageous feature of performance related pay. Because of lack of awareness to the right policy of assessment, the employees face problems in analyzing their own performance against their pays (Marsden and French 1998). In performance related pay mode, a person working in a group is not assessed by considering him/her a part of a group but an individual due to which, there can be problems with his/her relationships with other group members (Courty and Marschke 2001). Due to performance related pay, there can be strained relationships between group members. The employer and employee can also have a strained relationship because of negative remarks from the employer on the performance of the employee. The employee can consider his/her pay unjustified (Marsden and French 1998). Equality is also a problem because the workers receiving performance related pay are not always dealt with equality. The management of an organization keeps the right of assessing an individual’s performance (Booth and Frank 1999). There can be favouritism and prejudice by the management side due to which, the workers who are justified to be rewarded gets negatively affected. Due to this action of inequality, the individual’s performance along with the workplace’s performance is affected negatively. The disadvantageous features of performance related pay outweigh its advantages because the advantages can only appear to be advantages if certain factors are taken care of. The advantages can turn into disadvantages taking a view the management policies and employer’s criteria. With discrimination or prejudice from the management side, there is no reason for the performance related pay to be advantageous for the workers. With all forms of performance related pays, there are disadvantages associated that are quite influential and they cannot be negated. Conclusion It is quite evident that performance related pay has some advantages but its disadvantages are not ignorable. The disadvantages associated with performance related pay undermine the advantages. The management should work neutrally while adopting the methodology of performance related pay. It is generally seen that employees receiving fixed pay are not advantaged while employees receiving performance related pay are unable to get pleasure from the benefits associated to fixed pay receivers. Employees not always receive their due rightful pay according to the payment criteria of performance related pay due to which, they are discouraged and their performance is affected negatively. References Booth, Alison and Frank, Jeff 1999, Earnings, productivity and performance-related Pay, Journal of Labour Economics, 17(3), 447–463. Courty, Pascal and Marschke, Gerald 2001, Performance Incentives with Award Constraints, CEPR Discussion Papers 2720. Kauhanen, Anti and Piekkola, Hannu 2006, What makes performance related pay work? Finnish evidence, Journal of Management Governance, 10, 149–177. Marsden, D and French S 1998, What a performance: performance related pay in the public services, Centre for Economic Performance, LSE, London. Prentice, G., Burgess, S. and Propper, C 2007, Performance pay in the public sector: a review of the issues and evidence, Office of Manpower Economics, London. Read More