Pay For Performance

Pay For Performance

Abstract

Pay for performance is becoming more and more popular in both the public and private sectors. The plan expands the business quality, and efficiency is more affordable. This paper reviews the background of pay for performance model, the measures of adequate pay for performance, and the advantages and disadvantages of pay for performance plan. The plan has the benefit of increasing employee retention and increasing earnings to employees, which in turn increases productivity. There is also less supervision as the employees are motivated to make efforts so they can improve their profits. However, the model also has its cons. The challenges are the less employee input, contention among employees, and resistant to changes.

Pay and performance plan can be measured by first setting out the reward goals, conducting a review, piloting and making improvements, and finally continuing to measure and monitor the reward arrangements. An organization should also consider the ten C’s while measuring the effectiveness of pay for performance plans. The ten C’s include competitive to recruit, compliant, convergent with business strategy and required values, skills and behaviors, controlled, changes in response to changing needs, customized to needs of different employees, contribution, cost-effective and affordable, well-communicated, and finally commit employees.

Before a company decides to use the pay for performance plan, they have to consider the benefits and challenges facing pay for performance plans. The managers should also be aware of the ways to measure the effectiveness of pay for performance model. Thorough research and analysis were done on this paper to provide sufficient information on the topic.

Keywords: Pay for performance, productivity, earnings, measures, advantages, disadvantages.

Pay for Performance

Companies in America are now adopting the pay for performance model for employees. Pay for performance is a model where employees are paid according to their productivity. Pay for performance is different from the set wages based on hours worked (Kondo et al., (2016). The pay for performance model is used, primarily where the bonuses and commissions are based on sales secured via those sales. Pay for performance is aimed at efficiency and improving the quality of a company. The purpose of this paper is to analyze the pay for performance model in details. The article discusses the advantages, disadvantages, and measuring the effectiveness of pay for performance model in companies.

Advantages of Pay for Performance

Less Supervision

With pay for performance model, the employers tend to experience less employee supervision. The employees show their efforts, knowing that their input is what will contribute to their pay ((Mendelson et al., 2017). Fewer supervisions save the company the overhead costs. Most employers find the pay for performance model adequate since the policies in the model increases productivity, which then leads to higher profits.

Increase in Earnings and Productivity

In pay for performance plans, the employees are in control of their wages, and therefore, they can increase their earnings. During holiday seasons, for example, the employees improve their incomes and the company’s production to earn the extra money (Dee, 2015). An increase in earning benefits not only the employee but also the employee since there is an increase in productivity. A desire for more income results to a more productive employee, the employee can be able to deliver more in a short period.

Increase in Retention

An increase in employee retention is one of the benefits of pay for performance plans. The employees who earn high bonuses get motivated to stay because they feel the company usually reward their efforts. Unless with other issues, no employee would wish to leave a job where they are given extra income. Also, the long-standing stints are a result of comfortable commissions, paychecks, and good relationships.

Motivating Drive and Flexibility

Pay for performance models are valid for self-starters who are inspired by a chance to do more to increase their income levels. With increased inspired and motivated employees, the company benefits a lot. Employers and some of the employees enjoy the flexibility of pay for performance model (Noe et al., 2017). Organizations with pay for performance plans have an opportunity to set their working hours that fit their lifestyles. This results in less use of resources and office space for organizations.

Disadvantages of Pay for Performance

Contention among Employees

Pay for performance policies tend to create an assertion among employees. An employee may feel that the employer shows some favoritism by helping individual employees get bonuses and higher salaries (Mendelson et al., 2017). Employees who do not earn rewards can be jealous of those getting the performance bonuses, and this may result in animosity between employees. Workers not offered the option of pay for performance plan may be discouraged and confused as to why others require the program to work hard. Contention and jealousy can reduce productivity as they create a hostile working environment.

Also, managers need to be fair while executing the pay for performance model. If the employees spend more time and resources on a particular employee to get higher compensation levels, other employees may gain distrust and animosity (Rosenthal et al., 2015). The company should not support competition but encourage collaboration for those employees on pay for performance plans.

Less Employee Input

Pay for performance plans may cause fear among employees to give their employers their input for change. The employees may hold back their good ideas and inputs because they fear their earnings may be reduced (Noe et al., 2017). Changes may bring the uncertainties that the compensation patterns may change, and therefore the well-compensated employees may choose to remain silent. Companies rely on and value the input of employees to make decisions about the company.

Resistant to Changes

Employees are often resistant to changes in a company. The organizations with the pay for performance plans are unlikely to change the outdated or unproductive models. The employees’ fear in alterations of the operating procedures may lead to lower productivity. Organizations that make changes without considering the employee resistance usually experience a reduction in production because the employees lack motivation (Dee, 2015). Employers explaining the need for the changes and providing adequate training to the employees may help in reducing the resistance.

Measuring the Effectiveness of Pay for Performance

Evidence shows that measuring and improving the effectiveness of pay for performance plans is very significant to employers (Mendelson et al., 2017). According to Miller (2018), there is a link between organization performance and HR practices. These HR practices include those that empower employees, increase skills, and improve motivation. The pay for performance has an impact on these HR practices.

The first step to measure the effectiveness of pay for performance practices is setting a reward strategy goal, which describes the meaning of efficacy and how to measure it. The next step is conducting a rewarding review by assessing the current reward policies using both situations, specific evidence, and extensive research in the company. The company should also recognize the key issues and agree to changes. The third step is to pilot and make improvements from the review. The final step involves continuing to monitor, measure, and review and adapt the rewards set.

Step 1: Set Strategic Reward Goals and Success Criteria

Many companies believe that the strategic reward goals of an organization are recruiting, retaining, and motivating. However, being strategic involves setting out how one believes the rewards can lead to the success of an organization. The success can be achieved by establishing criteria to assess the progress and making changes to close all the gaps. According to Miller (2018), the basis of reward goals includes clarity and transparent, personal choice and flexibility, external market focus, and fair and equal rewards. Other goals include performance-related and differentiated pay, and business linkage and reinforcement.

The set of reward goals make changes to the pay structures, total rewards, and pay reviews, and they are used to assess the effectiveness of an organization (Kondo et al., (2016). Research shows that the essential criteria to evaluate the effectiveness of reward management are the ten C’s. The first C is the externally competitive to recruit, compliant legally and internally equitable and fair, convergent with business strategy and required values, skills and behaviors, controlled efficient to manage and administer, changes in response to changing needs, customized to needs of different employees, pays for contribution and performance, cost-effective and affordable, well-communicated, understood and valued employees, and finally motivates and commits employees (Dee, 2015). Although there is a conflict in the criteria, most organizations use the criteria, especially in a competitive market (Mendelson et al., 2017).

Step 2: Conduct a Rewarding Review

About 20% of companies in the USA have a specific review group that carries out periodic reviews of reward arrangements and audits the reward management (Dee, 2015). The reward arrangements require a regular assessment of existing changes and rewards. The effectiveness of the review involves gathering information on existing practices, agreeing on crucial reward issues to address, making assessments of the effectiveness of different reward practices, agreeing to the optimum improvements and planning their implementation, and lastly considering the possible options that will improve the provision of the reward goals. A lot of researches helps in assessing the practices if they are available and accessible. Examples include paying competitive bonus and incentive plans.

In pay competitiveness, there are negative of paying beneath the market median charges. According to Börner et al. (2017), reward policies have more impacts on the value of a company’s growth apart from other aspects of HR management. However, the base pay competitiveness shows that only 0.2% of a company’s growth, including the pensions, stock ownership, total reward, and individual and group incentives have a significant impact on a company.

Bonus and incentive plans, on the other hand, are the aspects of reward. Research demonstrates that high performing organizations utilize cash incentive plans and share plans among employees. According to Mendelson et al. (2017), incentives tend to draw two conclusions; the first conclusion is that the employees usually respond to cash incentives, but the second conclusion is that the employees may react in ways that may or may not benefit the company.

However, extensive research will help in informing the review of reward effectiveness. Searching for evidence in an organization is vital (Noe et al., 2017). The study will help in coming up with the best fit model of reward effectiveness apart from the best practice approach used universally (Börner et al., 2017).

Step 3: Piloting and Making Improvements

A survey in the reward management reported that implementing strategic reward changes can be very difficult (Dee, 2015). The external research in this field is explicit, and employee communication and managerial involvement are critical. According to Börner et al. (2017), companies that rate their pay changes as less effective are also likely to report that they devoted too little time to training managers, communications, and program testing. Therefore, to improve the impacts of reward on performance, then the company has to be devoted to improve the management process and reward communications.

Step 4: Continuing to Measure, Monitor, Review and Adapt the Rewards Package

Improving and evaluating reward arrangements is not a quick win but a continuous process. Companies need to put clear performance measures after the changes have been made in the assessment process, and the progress is monitored against them (Kondo et al., (2016). Effective organizations cannot be differentiated by having data, metrics, and information at reward evaluation. The company instead seeks to focus on the vital human capital measures and integrating them into the reporting and management process (Dee, 2015). The information provided is used by line managers to improve the experience of the rewards of the staff and by HR to improve the plan designs (Rosenthal et al., 2015).

For example, a law firm Cameron was able to address the challenge of high turnover in their legal secretaries using changes in working conditions and rewards. The employees report that more than 50% of partners in the firm were employed as apprentices, which is an eye-catching statistic for determined law graduates (Börner et al., 2017).

Many organizations carry out a regular review and monitoring their statistics, HR, and employees. The aim is to improve and assess the effectiveness of the reward arrangements and HR. Excellent relations between business and employee engagement leads to a branch network. According to Miller (2018), the role of reward, therefore, is to create a high engagement and high-performance culture.

Measuring the effectiveness of a company’s pay for performance plans can experience challenges. The barriers include lack of time and resources and lack of skills and training in finance, statistics, research, and quantitative methods in the HR department. The HR department may also be lazy to do some of their functions. The other problem is the divide in academics in HR, which may lead to some of the useful research being hidden away.

Conclusion

It is vital to measure the effectiveness of the pay and performance model in an organization, but before measuring the company has to outline the importance of the measurement and assessment. Before a company decides to use the pay for performance plan, they have to consider the benefits and challenges facing pay for performance plans. The managers should also be aware of the ways to measure the effectiveness of pay for performance model.