Pay for Performance - Essay Example

Running Head: Pay for Performance Pay for Performance [Institute’s Pay for Performance Introduction One of the most important concepts today in organizational behavior is of job satisfaction or employee satisfaction. Gone are the days, when organizations could stop their employees from forming unions, putting up their ideas, and asking for input in the decision making process of their managers. In fact, organizations have come to realize that employees are their most important stakeholders and these are the employees on whom the organizational success and productivity depends the most. Therefore, most of the organizational behaviors experts diverted their attention to the concepts of employee satisfaction, employee motivation and employee productivity. Quite understandably, these people were in search for a formula or the prominent factors, which can affect these above mentioned variables. This search led these experts to many new concepts and approaches and out of them “pay for performance” is one of the most debated, and discussed ones. This paper, therefore, focuses on the same concept and is an attempt to analyze and explore different dimensions to this concept. Discussion It is important to understand that this system cannot come under study in isolation with the other systems of fixed pay systems. This is because that actually shortcomings and problems within the existing systems led to the discovery and creation of pay for performance. In fact, pay for performance was an attempt by organizational experts to rectify the problems with the fixed pay plans. One of the biggest problems with fixed pay plans was their inability to motivate employees to put in the extra effort. Employees were asking themselves that why should they put in extra effort into their jobs when they are not getting any rewards for the same. Tangible or intangible rewards are quite understandably the biggest motivational factors of the employees most of the times, and without their presence, life became miserable for the mangers who want extra quality work from their employees. Moreover, this was the time in the history when the market was increasingly becoming a ruthless and aggressive place, when their bosses asked managers and company heads to continue a two-fold goal of cutting the costs and increasing the productivity of the organization and both at the same time. This eventually meant that the managers would have to motivate the employees to put in more effort with the same rewards, pay, or remuneration. As mentioned above, this was certainly not possible. This situation was problematic from two sides of the picture. The first side of the picture is of the employees. If an employee finds him as under motivated or less motivated, then, it leads to lesser productivity from him and consistent laziness and low productivity levels can rust the employees’ performance over a period. Moreover, if an employee stops putting in any extra effort than it certainly means that the employees would end up having little or no favors from their managers. Employees were asking the promotions and pay rate increases from their managers in return for their performance, quality of work and extra effort but the situation became even worse because it was the seniority, length or service or age that was the determining factor of promotions and pay rate increases (Andersen & Pallesen, pp. 28-47, 2008). Many organizational behaviorists record that this became a serious problem for many schools and educational institutions where this seniority based promotions system was strictly a part. Moreover, teaching is a job for which a job description is never enough and teachers always find themselves working more than their “on paper job.” Since they deal with students who require inconsistent and variable attention from then, therefore this is quite understandable. However, as the cost of living slowly increased and the market become more and more competitive, many teachers and academicians also felt the acknowledgement in any possible terms of their performance. Unfortunately, the systems of those educational institutions failed in doing so thus creating a problem for them. The other part of the problem is even serious and is from the side of the organization. For the past few decades, organizations are feeling the pressure of survival, growth, continued profits, lesser costs and higher returns. Quite understandably, all these goals are not achievable with out increasing the over all productivity of the organization. Moreover, the organization’s productivity is the sum of the productivity of all the employees; therefore, it became important for them to increase the productivity of all their employees in order to achieve their objectives and goals. However, low motivational levels of employees and lesser performance standards shown by them meant that the organization would never be successful in achieving their goals. In addition, firms who still wanted growth, expansion, and higher productivity levels had no choice but increase the pay of all their employees or hire new ones to achieve their goals. However, going with any of these options meant higher costs for the organization but the former being less costly than the latter. Management gurus soon figured out that there is something hurting their growth and they were soon able to figure out that this has something to do with the motivational levels of the employees. Furthermore, these experts soon found that the relation between an employee and an employer is not similar to that a beneficiary and a trustee enjoy (Andersen & Pallesen, pp. 28-47, 2008). However, their relationship is under characterization by low trust and is more of a principal agent type. Therefore, Modern human resources came up with the idea that the compensation and rewards system should focus on three essential points. Firstly, these systems should be effective and effectiveness refers to the fact that with increased compensation and rewards, the productivity shall also increase with even a higher intensity. Secondly, these systems should be flexible enough to the employees’ needs, wants attitudes, and preferences. This meant that this system should give employees a chance to choose the magnitude and quantity of their work. Lastly, the pay system should be fair that all employees feel it reasonable and justifiable. Pay for performance was the answer to all these questions and problems. Experts define this system as “Compensation contingent on performance that is awarded to individuals and/or groups either as permanent increments to base salary or as bonuses” (Andersen & Pallesen, pp. 28-47, 2008). Pay for performance, without any doubts, is the order of the day. Many firms all around the world are applying this concept of their management practices. These include big names like Wal-Mart, IBM, Mc Donald’s, Pizza Hut, Google; Sun Microsystems, John Deere, American Steel, Wire, and many other firms. One of the biggest advantages that this system provides is that it increases the productivity and performance of the employees. Quite understandably, with a pay for performance system employees are aware of the fact that none of their efforts would go wasted and all of it would come on paper and provide benefits for them. It is important to understand that employees do not work for a firm because they are so-called loyal to the company and or are in love with the other company. The work for the organization because of their “give and take” relationship with the organization (Dunleavy & Hood, pp. 9-16, 1994). With pay for performance systems, organizations can enhance this relationship and make it fair, effective, and flexible. When educational institutions and other organizations had implemented pay for performance systems they found even their younger and new teachers putting their best because these teachers no more could question themselves that “why should they put in an extra effort”? They had a clear answer for it and that was money, salary, or compensation (Dunleavy & Hood, pp. 9-16, 1994). Experts say that pay for performance system is the best way to link, relate or adjoin individuals desire to earn more, excel and increase their benefits and status with the organizational goals of higher productivity, growth and expansion. In fact, it creates a win/win situation for both employees and the company. As one Japanese expert said that “It is not just a method of changing the wages of employees, but it is way to achieve the organizational goals set by the company’s top management” (Bratton & Gold, pp. 15-19, 2001). A recent research has suggested that the companies, which had pay for performance system where the some how the least effected with the shocks of recession. However, organizations following fixed pay methods felt the shocks of this recession to an extreme. Due to many reasons, external and internal, recession is a period when somewhat all organizations fail to meet their previously benchmarked quality and performance standards. For an organization having pay for performance method, low performance means lesser labor costs. What can be better for a company to find a good way to decrease their labor costs, which formulates the biggest chunk of the organizational costs? (Arnold & Silvester, pp. 69-76, 2005) However, on the other hand, companies not following this system had to stick with their high costs of labor during the times of recession with low performance levels. Ultimately, they had to fire their employees in order to decrease their labor costs. Firing employees’ does not solve the problem for any organization. It actually sends a message of fear and danger to other employees and psychology tells that with these feelings employees cannot be productive at least in the end. With pay for performance systems employees try to follow the goal setting theory. Since performance measured is always in quantitative terms rather than qualitative terms, therefore, the employee at the start of the month or the start of the year would prefer to set quantitative and measurable goals and would try their best to achieve them (Artz, pp. 315-343, 2008). Moreover, since everybody wants higher pays and remuneration therefore they would set difficult goals and put in higher effort to achieve them. Quite evidently, pay for performance makes life easier for managers since it is not only a compensation plan but also a performance management and appraisal plan at the same time as well. It is very an automatic and self-corrective, which forces employees to increase their performance in case of low performance (Arnold & Silvester, pp. 69-76, 2005). It is also important to look at a few forms that pay for performance may take in different organizations. Piece rate pay and merit based pay are the most common of all. The former pays employees based on the number of units completed and the latter aims at rewarding employees based on their annuals performance management appraisal (Gaertner, Gaertner, & Akinnusi, pp. 525-543, 1984). Many organizations these days are providing random or specified bonuses to their employees for their hard work and dedication. This certainly is a good move since it will lead our society to a society of meritocracy. Linked some how with pay for performance are skill-based plans where employees get higher remunerations for acquiring more and more skills required by the organizations. For example, at American Steel Wires, an individual can increase its annual income to more than twelve thousand US dollars by acquiring ten or more skills (Bratton & Gold, pp. 15-19, 2001). Organizations believe that more talented and skillful can prove to be a better resource for the organization in the future. Moreover, with individuals trained for several skills required by several departments, inter-departmental communication increases and witnesses as boost. However, this sort of system is good until one extent and after, it can increase problems and costs of the organizations (Andersen & Pallesen, pp. 28-47, 2008). For example, what if all the employees of the organizations acquire all the skills required from the organization. In this situation, the organization would have to pay all these people the maximum pay and quite understandably, it would not be taking out that much work from these employees (Gabris, pp. 70-89, 1986). Even worse, this may promote a feeling of laziness and uselessness amongst the employees. Recently, many companies have come up with plans like Employees Stock Options Plans (ESOPs). Organizations also believe that by implementing this, they can pay their employees on their performance. According to basic financial management, the prime objective of a company is not to maximize their sales or profits but to increase and ensure the shareholders wealth maximization (Bratton & Gold, pp. 15-19, 2001). During ESOP’s employees, get stocks of the company normally at lower price than the current market rate. Companies like Publix Supermarkets and W.L. Gores and associates are now more than 50 percent employee owned. It is beneficial because it helps creating a sense of association and ownership amongst the employees of the company. Moreover, it urges the employees to conduct practices that increase the share price of the company thus decreasing the potential problems between the shareholders who are the financers of the company and the company management. In this way, both of them work for similar goals (Perry, pp. 1-13, 2009). However, many experts also think that pay for performance has some serious problems with it and needs urgent revisions. These experts are of the view that the problem with pay for performance starts when managers actually start considering it as an automatic and self-corrective system. As mentioned earlier in the paper, pay for performance has the capability to force the employees virtually to increase their performance in case of lower performances. Additionally, performances become so evident in form of the pay levels that even peer-pressure and equity theory can do their job. However, these experts believe that during all this, HR mangers tend to relax and have coffee in their air-conditioned cabins. The managers think that the high performers would excel and their pays would show who deserves promotion or not. Moreover, the low performers would fell the pressure to raise their performance standards in order to survive, compete, and match with the team status. Conversely, this assumption at times is not the healthiest (Perry, pp. 1-13, 2009). This allows managers to leave their task of coaching and mentoring. Quite understandably, coaching, mentoring, control, guiding and helping the employees remains one of the most important and foremost tasks of managers. However, with the pay for performance system the manager does not bother to find out the reasons behind the low performance of the low performers but instead assumes that the self-corrective system would either force him to increase his performance or leave his job (Artz, pp. 315-343, 2008). Another problem with pay for performance conducted based on yearly appraisals or yearly bonuses is that they take a long period in rewarding employees. For example, in a company where this system is there a yearly appraisal system they employee may lost his or her motivation for working hard after waiting for a year or so. However, many companies have resolved this problem by making their pay for performance system on monthly basis. Research also indicates that pay for performance systems have not been comparatively effective for higher levels of management rather than for the lower levels of management. Experts have defined their degree of ambiguity and clearness of job description and scheduled tasks as one of the most important reasons of this difference (Perry, pp. 1-13, 2009). Lastly, these systems have not done well in the public sector organizations as compared to the private sector organizations. Research indicates that the lack or transparency and budget constraints are the major reasons behind the failure of pay for performance system in the public sector organizations. References Andersen, Lotte B., and Pallesen, Thomas. (2008). “Not Just for the Money? How Financial Incentives Affect the Number of Publications at Danish Research Institutions.” International Public Management Journal. Volume 11, pp. 28-47. Arnold, John, & Silvester, Joanne. (2005). Work psychology: Understanding human behaviour in the workplace. Prentice Hall/Financial Times. Artz, B. (2008). ‘The Role of Firm Size and Performance Pay in Determining Employee Job Satisfaction Brief: Performance Pay, and Job Satisfaction’, Labour Journal. Volume 22, pp. 315-343. Bratton, John, & Gold, Jeffrey. (2001). Human Resource Management: Theory and Practice. Routledge. Dunleavy, Patrick, and Hood, Christopher. (1994). ‘From Old Public Administration to New Public Management’. Journal of Public Management and Money. Volume 14, pp. 9-16. Gabris, Gerald T. (1986). ‘Can Merit Pay Systems Avoid Creating Discord between Supervisors and Subordinates? Another Uneasy Look at Performance Appraisal’. Review of Public Personnel Administration. Volume 7, pp. 70-89. Gaertner, Gregory H., Gaertner, Karen, N., and Akinnusi, David, M. (1984). ‘Environment, Strategy, and the Implementation of Administrative Change: The Case of Civil Service Reform’. Academy of Management Journal. Volume 27, pp. 525-543. Perry, James. (2009). “Back to future? Performance related pay, empirical research and the perils of persistence.” Public Administration Review. Volume 69, pp. 1-13. Read More