The Effectiveness of Pay for Performance Programs - Assignment Example

The Effectiveness of Pay for Performance Programs in Generating Improved Business Outcomes Human Resource EconomicsAny organization’s pay system objectives aims at improving performance of current employees, retaining them in the organization, prevailing fair treatment and equality and attracting new promising employees in order to achieve the organization’s short term and long term goals. Pay for performance programs seek the same objectives. In such programs, monetary rewards are given out as a means of appreciation and motivation to those employees who perform well. Pay incentives for performance in not a new phenomenon as it can be dated back to the Napoleon era, when Napoleon committed to pay 12,000 Francs to anyone who was able to find any way to store food over a long period of time. At that time the pay for performance program proved to be a success when Nicholas Appert won the 12,000 Francs reward by generating a technique for canning food (C. McMahan. 1993). Jay Schuster, a partner in Schuster Zingheim and Associates, Inc. said that “The organizations that do indeed truly reward people consistently for performance outperform those that dont. My sense is, if youre not going to pay for performance, what are you going to pay for?” (Schuster), making it apparent the fact that it’s that an organization that pays for performance would obviously do much better in achieving its organizational goals. Various theories and studies are there to support the effectiveness of pay for performance programs. The expectancy theory explains best why a pay for performance program can help achieve an organization its goals through motivating its employees to perform. The expectancy theory states that the motivation required for an employee to perform depends on the employee’s desire for the reward and that motivation would enable the employee to perform which would result in achieving that reward (Vroom, 1964). The expectancy theory also discusses certain conditions which fosters the use of pay for performance programs in order to achieve desired performance which includes that; the employees comprehend the plan performance goals as achievable, the relation between performance and pay is easy to understand and is made known to all concerned employees, the employees value the reward and find the link between performance outcome and reward size as satisfactory (John Edward. 1973). Another theory, the goal-setting theory, further supports the pay for performance program by establishing some facts describing how goals should be formulated in order to stir up that motivation in the employees inspiring them to achieve those goals. The goal-setting theory states that goals should be made in such a way employees find them to be unambiguous, achievable, challenging, and acceptable (Locke, 1968). Both the expectancy and goal-setting theories combine together to foresee that pay for performance plans can ameliorate performance outcomes by encouraging employees to expend efforts in order to achieve their organization’s goals. Also, theory states that rewards given for a certain performance tends to be able to reproduce that same performance. Pay for performance programs can take shape through various means, each suitable for a different situation. Where piece rate system, sales commission, merit pays and individual bonuses cater to pay for performance at the individual level, stock options, profits sharing and gain sharing results in pays as a result of company performance (Bauer, Talya, and Berrin Erdogan. 2009). Hence, various organizations and within that various employees require different methods of pay for performance to be used in order to be able to produce the required performance level. While the pay for performance plan seems to be very advantageous for any organization, they do happen to have a few disadvantages at the same time. They might in certain situation discourage creativity by paying for performing in a certain way only. Hence, if employee try and take the risk of doing something differently with an intention of performing even better, and that effects his paycheck negatively, he would be de motivated of trying to do the same again which would ultimately mar his creativity (Alexandra K. Wigdor. 1991). In the manufacturing and retail sector, one way the employees can be easily evaluated is by keeping a record of the units manufactured or processed by the employee in a given time. This will measure the efficiency of any manufacturing employee. However, apart from efficiency, effectiveness is also a key aspect to be measured. This means that just completing the process doesn’t mean that the employee is performing well. What also needs to be measured is the quality of work the employee is doing. For that purpose, a standard could be set, making it apparent that the defined standard has to be met. The more an employee’s output varies from the standard, the poor the quality of work he is doing. Also, if one puts too much pressure on producing more units in less time, the quality of outcome may tend to suffer as after a certain level the employee would be prone to making more mistakes. Performance can also be measured by checking how cost effectively an employee does work. This is only applicable in those cases where employee has the authority to use variable amounts of the organization stuff that incurs a cost. An employee might be able to give really good quantitative and qualitative output during the time he works, but if the same employee has a habit of being frequently absent at work, then obviously his performance evaluation will be negatively affected, hence absenteeism is also a very important aspect of evaluation. A similar factor would be tardiness which should be kept tract of, of each and every employee as it can give important data at the time of evaluation. Creativity is a tool which can be very beneficial for any organization. Hence, difficult to be measure, it should still be included in the performance evaluation plan. Even though creativity has been given much importance in many studies, one should still have policies in order to keep the employees on tract. For such policies are always there in every organization, it’s absolutely necessary to keep a check of whether an employee is abiding by those policies or not. Personal habits and behavior, though something not related to work, does at times affect an employee or other employees’ work. Hence supervisors should observe such habits and behavior s and their affect on work and inculcate this observation in the performance appraisal. There are certain jobs, but not all, especially in the retail area which require the employees to be presentable, appropriately dressed and well groomed. Therefore for such workers, appearance, dressing and presentation skill should also be gauged and evaluated. Apart from the factors which should be evaluated in the appraisal, another important part of performance evaluation is the evaluator. An employee should undergo appraisals conducted by his manager, team mates, peers and even the customer when it comes to the retail end, as it’s the customer one is catering to, and the info regarding an employee that a customer can provide can prove to be a very good means of data for evaluation (Grote, Richard C. 1996). While devising a pay for performance plan, there are a certain key ideas one should pay special attention to for the plan to be a success and not a waste of time and money. Firstly, the firm should have a culture that supports pay for performance plan which means there should be healthy competition between employees and that they clearly understand each expect of it and find it fair and motivating. Also a pay for performance plan should be imbedded into the organization’s culture and not be used just as a separate Human Resource practice. Also, the pay for incentive plan should be aligned with the organization’s long term and short term goal because by doing so, not only when an employee performs or out performs himself will he be paid for it, but also that would be benefitting the organization in achieving its goals. Next, it should be made sure that the plan’s supervisors are fair, just and unbiased in collecting, interpreting, evaluating and reporting data. One method of doing so would be having a panel to review evaluations and maybe even having a internal appeal process for re-reviewing. Not just that, the supervisors of such plan definitely require rigorous and continuous training enabling them to carry out the incentive plan justly and up to the requirement. When it comes to training, apart from the supervisors, the employees also require training to make them better understand how the pay for performance plan works, what kind of acts, accomplishments, performances and behaviors would be rewarded and also training sessions should be held in order to overcome give the employees a proper thorough feedback, letting them know of their weaknesses that come clear during the evaluation and helping them guide the way of overcoming those weaknesses. Helping employees overcome their weaknesses is very important as employees are the organization’s assets and helping those means helping the organization to perform better. Further, employees should also me made understood the organization’s goals and how they are going to be able to help the organization achieve those goals. Also, a suitable period of evaluation should be decided according to the organization’s requirement and regular evaluations done after every defined period of time in order to keep up to dated and ensure proper check and balance which would also make sure that employees do not lose interest in the plan because of the uncertainty of the frequency with which rewards for their performances are distributed. One very important thing to make sure for such plans to work is that there should be adequate funding within the organization as obviously by motivating employees through temptation for the reward, it should be made sure that the rewards are given out in a timely manner. Further, it is important for the organization to present the employees who are really performing very well with significantly big and justified incentives and bonuses. Lastly it is also very imperative that the entire pay for performance plan be regularly evaluated for also changes are made in that plan if and when necessary. This is because it do happens at time that as the organization achieves its desired goals, new goals are made or goals might be modified if they are figured out to be unachievable. In such a case, the entire pay for performance plan, its goals and methodology can become obsolete and require for extensive review and changes to be made. Also, there are instances when under a current pay for performance plan supervisors are making too many mistakes in evaluation and/or reward distribution and hence the need to simplify, modify and make the entire plan more transparent becomes absolutely vital (1615 M St., N.W., Washington 20419). To sum it all, Pay for performance plans are one of the most widely used and tried and tested program used in order to achieve better organizational performances but it should be tailored carefully according to the organizations needs and goal in order for it to be a success and produce positive outcomes. Bibliography Milkovich, George T., and Alexandra K. Wigdor. 1991. Pay for performance: evaluating performance appraisal and merit pay. Washington, D.C.: National Academy Press. Sheridan, John Edward. 1973. The expectancy theory of motivation: a model of job selection. Springfield, Va: National Technical Information Service. Wright, Patrick M., Jennifer M. George, S. Regena Farnsworth, and Gary C. McMahan. 1993. "Productivity and extra-role behavior: The effects of goals and incentives on spontaneous helping". Journal of Applied Psychology. 78 (3): 374-381. Locke, Edwin A., and Gary P. Latham. 1990. A theory of goal setting and task performance. Englewood Cliffs: Prentice-Hall Bauer, Talya, and Berrin Erdogan. 2009. Organizational behavior. [Nyack, NY]: Flat World Knowledge. Grote, Richard C. 1996. The complete guide to performance appraisal. New York: AMACOM. United States. 2006. Designing an effective pay for performance compensation system: a report to the President and the Congress of the United States. Washington, DC (1615 M St., N.W., Washington 20419): U.S. Merit Systems Protection Board. Read More