Is Performance Related Pay a Proven Path to Improving Employee Performance and Job Satisfaction - Essay Example

of the of the Concerned Manager 7 March Is Performance Related Pay a Proven Path to Improving Employee Performance and Job Satisfaction? Introduction Simply speaking, performance related pay pertains to such a system that relates the rewards extended to an employee to the overall performance of the organization in which that employee serves (Smith 2003, p. 109). The purpose of performance related pays is to motivate the employees (Smith 2003, p. 113). The other big objective behind the performance related pay is to synchronize and align the performance of the employees to the overall aims and objectives of the organization in which they work (Smith 2003, p.114). Though, the performance related pay is mostly financial, but sometimes it could also happen to be non-financial. The payments made under performance related pay schemes are usually in addition to the actual pay that an employee gets. This makes the employees appreciate the fact that the rewards one gets for ones performance are not invariable and rather tend to be variable and separate. Many a times the augmentation in an employee’s annual basic salary could also happen to be related to one’s performance. Performance related pay helps the organizations retain the employees who have attained the top rank in relation to their pay scale and are still accruing an outstanding performance (Smith 2003, p. 115). In the present context, when the organizations are getting much flatter, the organizations are bound to abound in the employees who come under this category (Dean 2002, p. 133). Further, the opportunities for extending promotions in the flatter organizations happen to be much less as compared to the multi layered organizations of the past (Dean 2002, p. 134). Hence, the performance related pay is one viable method of improving employee performance and extending job satisfaction. Common Types of Performance Pay Over the last two decades, there has been a considerable rise in the performance related pay systems (Beardwell 1996, p. 148). Though the performance related pay system was more common in the private sector, there is no denying the fact that many public sector organizations are also evincing a gradual shift towards performance related pay systems (Beardwell 1996, p. 148). The best thing about performance related pay systems is that they link the payments made to the employees, to the group, individual or organizational performance (White & Druker 2000). The organizations resort to a wide array of performance pay systems, yet, the primary assumption behind all such systems is that the opportunity to get an enhanced pay will motivate the employees to work better and will positively impact their productivity (White & Druker 2000). Piecework is the oldest form of performance pay system which links the payment made to an employee to the units of output produced by one (Bassett 1993, p. 3). This motivates the employee to work harder and better, as the production of optimal number of high quality productivity units is bound to be reflected in one’s pay slip. A payment by results is one other major performance pay system, where the bonus earned by the individuals or groups is associated with the value or quantity of the output (Meij 1963, p. 32). Merit Pay happens to be a less structured pay system where the payments made to an employee are based on the evaluation of the contribution of that employee to the organization (Rudman 2003, p. 179). Competence pay is one other performance pay system where the pay of an employee is linked to a range of skills and abilities inherent in an employee (Bolton 2007, p. 196). Profit related pay is the performance pay system that is most widespread in the private sector, where the bonuses, incentives and share options extended to the employees are directly dependant on the profitability of the organization. Performance Related Pay Performance related pay is the most recent development in the performance pay system, where the earnings or payments made to the employees are linked to a formal appraisal or assessment of an employee’s performance with regards to some already set objectives (Heery & Salmon 2000, p. 94). There are varied reasons owing to which the employers tend to vouch for the performance related pay. It makes it easier for the employers to clarify the organizational objectives to the employees and helps them actively engage the employees with the broader organizational goals (Heery & Salmon 2000). Performance related pay also helps the employers to bring in more flexible and pliable pay systems and helps them in dealing with retention and recruitment problems (Heery & Salmon 2000). Performance related pay also helps the employers to motivate the employees by linking the remuneration to performance and achievement of targets rather than to the experience or length of service (Heery & Salmon 2000). It goes without saying that many studies have corroborated to the fact that the introduction of the performance related pay systems helps boost the overall efficiency in and productivity of the organizations (Heery & Salmon 2000). This system of remuneration also ushers in an environment of fairness and team work within organizations and helps the employers and the employees differentiate between performance and underperformance. There is no denying the fact that performance related system of pay is used by many organizations to bolster the influence and powers of the managers, and to dilute the power of the trade unions in matters of salary and remuneration (Heery & Salmon 2000). The good thing about the performance related pay systems is that it allows the organizations to rewards the employees whose performance stands to be above average as compared to the employees whose performance is just average (Morris 1998, p. 57). Certainly, there is no denying the fact that the decision to reward the performance of some employees by adhering to performance related pay system is to a large extent based on a systematic and thorough performance appraisal of the selected employees. The purpose of such appraisals is to assess the overall performance of an employee to measure the extent to which they have performed in comparison to their individual targets (Morris 1998, p. 58). It goes without saying that the performance related pay systems tend to have varied advantages and disadvantages. Performance related pay is certainly not an appropriate performance pay system to be used in organizations of all shades and hues. Advantages and Disadvantages of Performance Related Pay As already said that the performance related pay has its salient advantages and disadvantages. The most important advantage of the performance related pay is that it allows both the employers and the employees to discern the link between performances and pay (Weibel & Rost 2010). This encourages many employees to work to the best of their ability and to actively pursue the organizational goals. The employees whose performance happens to be above average do feel confident that the extra effort made by them is being noticed by the managers and it will be amply and sufficiently rewarded at the right time. In addition, the performance related pay also nudges the employees who are lacking in their performance to strive hard so as to be able to reap the benefits of good performance (Weibel & Rost 2010). It is a known fact that organizations are required to spend large amounts of money to place supervision personnel and mechanisms within their work premises. Performance related pay simply helps the organizations do away with the expenses incurred by them on supervision (Weibel & Rost 2010). When the employees know that the performance rendered by them will directly translate into pecuniary gains, they will do their best to outperform themselves, irrespective of the fact that whether they are being supervised or not. Since times immemorial, employee turnover and absenteeism happen to be two issues which make organizations loose tons of money (Rusaw 2009). High turnover also makes the organizations loose employees on whom they have spent ample time and resources while training them. There are varied factors that are responsible for high employee turnover and absenteeism. A lock of motivation is one big reason that makes the employees leave organizations in which they work. Performance related pay helps the organizations keep their employees motivated, thereby lowering the instances of employee turnover and absenteeism (Rusaw 2009). One other big challenge before the organizations is to keep the performance of the employees affiliated to the overall organizational objectives and goals. Many a times when the employees feel that they are doing their best, their performance stands to be way apart from the organizational goals and objectives. Performance related pay is really a very suitable method to make the employees work in tandem with the organizational goals and objectives (Rusaw 2009). This could readily be done by the managers by setting the realistic and achievable targets for the employees, and by resorting to periodic and systematic appraisals that are in consonance with the organizational aims and objectives (Rusaw 2009). Once the employees know that it is only the performance that is linked to the discrete and identified organizational goals and objectives that gets recognized and rewarded, they seriously abstain from wasting the organizational time and resources on futile and useless activities. Definitely, performance related pay is a performance pay system, which if practiced and applied systematically and objectively could do much to boost efficiency and productivity within an organization, be it public or private. If performance related pay has its advantages, it has its disadvantages also. One main objective of the viable organizations is to retain peace and harmony within the organization. If an organization stands to award those employees who yield above average performance, this may enervate those employees who feel that they are being discriminated against in matters of salary and rewards (Foss 2005). Hence, affiliations to the performance related pay systems could give way to discord and disharmony between various employees within an organization. Some employees may end up feeling that they are receiving less for the same magnitude of effort. Besides, the motivational attribute being ascribed to the performance related pay may not be that substantial as it is deemed to be (Perry, Engbers & Jun 2008)). Bonuses usually contribute a small percentage or proportion of the total salary and hence the employees may not feel that motivated by the performance related payments being made to them. In some cases the employees may end up feeling de-motivated in the sense that they may believe that they are not receiving much for the above average performance being contributed by them. One other flaw with the performance related pay is that in an organizational scenario, it is utterly difficult to measure performance (Perry, Engbers & Jun 2008)). The estimates of performance accrued by the managers in some cases may not be apt and accurate and many a times may make the employees feel that they are being cheated or discriminated against (Foss 2005). Performance related pay may make some employees loose much in case of the collective bargains being negotiated by the trade unions in the sense that decisions regarding pay are allowed to be made in case of the individual employees and not in a collective perspective (Foss 2005). Essential Attributes of Performance Related Pay Performance related pay systems need to have some essential attributes to make them pragmatic and viable (Green and Heywood 2008). While devising performance related pays systems, managers must take into consideration the trade unions and there should be an agreement on the employees to be included or excluded from the performance related pay mechanisms. Managers ought to assure that the performance related pay systems put in place by them work in a fair and transparent manner and all the employees have an equal access to the benefits being extended by the performance related pay systems (Green & Heywood 2008). As appraising performance is a time consuming and complex task, the organizations must extend ample time to the managers to appraise performance (Green & Heywood 2008). It is only then that the performance related pay systems could work efficiently and amicably. The training and skill enhancement opportunities being extended by the performance related pay should be equally accessible to all the managers and employees (Green & Heywood 2008). Provided, the performance related pays systems have these attributes, they could well be expected to yield the desirable results in terms of enhanced efficiency and productivity. Conclusion It is a known fact that managers do tend to evince a preference for the performance related pay as compared to other systems of rewarding employees, because they believe it to be the best method of extending incentives to the employees exhibiting an above average performance. However, it do needs to be mentioned that the performance related pay systems do have some inbuilt lacunas, and may not serve the desired purpose, if not imbued with some salient attributes. Reference List Bassett, Glenn 1993, The Evolution and Future of High Performance Management Systems, Quorum Books, Westport, CT. Beardwell, Ian (Ed.) 1996, Contemporary Industrial Relations, Oxford University Press, Oxford. Bolton, C Sharon 2007, Dimensions of Dignity at Work, Elsevier, Amsterdam. Dean, Joan 2002, Implementing Performance Management, RoutledgeFalmer, London. Foss, Nicolai 2005, Strategy, Economic Organization, and the Knowledge Economy, Oxford University Press, Oxford. Green, Colin & Heywood, John S 2008, ‘Does Performance Pay Increase Job Satisfaction?’, Economica, Vol. 75, Issue 300, pp. 710-728. Heery, Edmund & Salmon, John 2000, The Insecure Workforce, Routledge, London. Meij, JL 1963, Internal Wage Structure, North-Holland, Amsterdam. Morris, Steve 1998, The Handbook of Management Fads, Thorogood, London. Perry, James L, Engbers, Trent A & Jun, So Yun 2008, ‘Back to the Future? Performance Related Pay, Empirical Research and the Perils of Persistence’, Public Administration Review, Vol. 69, Issue 1, pp. 39-51. Rudman, Richard 2003, Performance Planning and Review, Allen & Unwin, Crows Nest, N.S.W. Rusaw, Carol 2009, ‘Professionalism Under the Performance-Based Pay Reform: A Critical Assessment and Alternative Development Models’, Public Personnel Management, Vol. 38, Issue 4, pp. 35-44. Smith, Stephen 2003, Labor Economics, Routledge, London. Weibel, Antoinette & Rost, Katja 2010, ‘Pay for Performance in the Public Sector- Benefits and (Hidden) Costs, Journal of Public Administration Research and Theory, Vol. 20, Issue 2, pp. 387-417. Read More