PERFORMANCE-RELATED PAY

Posted: August 25th, 2021

PERFORMANCE-RELATED PAY

by (Name)

Course Name

Professor’s Name

Institution

City (State)

Date

Performance-Related Pay

Before the 1980s, most of the public sectors in the OECD (the Organization for Economic Co-operation and Development) nations used a remuneration system which salaried workers based on the position they were holding without much attention to their performance. Based on either the analytical or non-analytical approaches, or sometimes a combination of both, the performance-related pay depended exclusively on job evaluation alongside its description and the required grades. Practically, this reward method focused on aspects like career advancement, seniority, and length of service. However, from the late 1980s to 1990s, a significant number of countries began redesigning their structure through the introduction of pay scheme that considered group or individual performance. Some of the champions of this transition included the United Kingdom, Netherlands, and New Zealand. After some time, other countries like Canada, Austria, and the United States equally made some steps by experimenting with the performance-based reward methods. Performance-related pay contributes significantly towards motivation, high wages, productivity, and returns for the firm. As a result, firms ought to embrace and appreciate the role played by this approach to enhance productivity.

Performance-related pay is an approach where the monetary compensation corresponds directly to the amount of tasks performed. It also includes financial rewards for employees that exceeded a certain set limit in performing specific assignments. As such, the establishment of performance-related pay can be justifiedby some theories as discussed by Nyberg et al. (2018). Expectancy and reinforcement theories, as well as agents and principles of microeconomics, are some of the main pillars of the approach. Expectancy theory suggests that members tend to employ more efforts when expecting reward they consider valuable. Economists concur with the fact that monetary rewards and salary constitute one of the benefits for the employees as discussed by Alfandi and Alkahsawneh (2014). Reinforcement theory focuses on shaping human behavior based on some rewards. According to Perry, Engbers and Jun (2009), this theory suggests that payment and rewards may influence and change employees performance to meet the desired behavior. Both theories confirm that employees are likely to perform better when they expect a proper remuneration.

Expectancy and reinforcement theories have played a crucial role in defending performance-based pay in public and private institutions. According to Perry et al. (2009), expectancy theory explains that people tend to work extra hard if they expect the result will compensate their efforts. Based on this assumption, workers, both the managers and the junior staff members, intensify their performance level to receive the monetary rewards that come alongside an individual’s input capacity. Based on reinforcement model, there is a direct link between an organization’s desired conduct, in this case performance, and its expected outcome in terms of payments. Thus, employers can use remuneration as a tool to set typical behaviors in an institution, which has an ultimate effect on overall performance among workers.

Currently, performance-related pay constitutes a significant portion of the payment approaches embraced by both public and private sectors. According to Frey, Homberg and Osterloh (2013), a considerable number of public-sector organizations utilizes performance-related pay approach either as a method of payment or in offering commissions. The authors further document high acceptance and appreciation of the proposal in the New Public Management (Frey et al. 2013). The private sector relies heavily on merit pay for salary, bonuses, commissions, and retirement plans (Reilly 2013). Merit payment is the current and likely the future trend. Traditionally, the approach gained high support from the private sector due to the high profits correlated. However, the public sector seems to appreciate the partial application of the procedure through rewards and commissions. Performance-related pay constitutes one of the conventional methods of the payment applied globally.

Numerous firms employ the approach as an attempt to maximize their output, especially in the private sector. According to Lucifora (2015), most companies offer merit-based pay depending on the quantity and quality of services provided globally. In the United States, 48% of employees in the private sector benefit from payment for performance (Lucifora 2015). Larkin, Pierce and Gino (2012) documented that more than 50% of fortune companies employ individual performance related pay. For example, by 2013, Portugal had payment for performance rate of about 50% as detailed by Lucifora (2015). However, Frey et al. (2013) note that at times implementation of the approach fails to achieve the intended purpose. The complexity of the indicators of performance and a number of factors to consider hinder the application of this type of payment.

Despite the integrity of the performance-related pay causal theories, the existence of a series of variables makes the relationship between remuneration and efficiency a bit complex. As shown in Figure 1 below, aspects like environmental conditions, employee attributes, organizational characteristics as well as the payment methods can alter essential variables, including job effect and features. The variables, in turn, change the perception towards performance outcome and effective results. These factors contribute to several challenges that influence the application of the approach. In particular, some of the difficulties include poor co-operation among workers, production of shoddy quality goods, high costs of implementation, inequality, and unnecessary pressure by the managers and supervisors. On the other hand, merit pay results in several positive outcomes. Some of the benefits include increased efficiency, defined objectives, motivation for hard work, aid in staff retention, and increased work independence.

Figure 1: Key variables in performance related pay research (Perry et al. 2009).

According to performance-related pay approach, every member receives wages or commission based on the measured throughput. Different workers portray different capabilities and speeds in the performance of similar tasks. As a result, cooperation enhances the production of higher quality products and services. However, performance-related pay undermines cooperation among members as discussed by Nyberg et al. (2018). Every employee strives to reach the set target or increase their rate of productivity at the expense of either holding discussion or engaging fellow members. Besides, the approach can contribute to fewer consultationswith the experts and experienced staff, which may result in lowered quality of products and services rendered.

The speed of operation affects significantly the measure of productivity as opposed to the quality. Most members strive to attain the set target or increase their productivity as compared to the quality of products and services. As a result, the approach compromises the quality of the product. For instance, in the sales department, the employees may neglect inquiries and challenging customers since they spend more time as opposed to working with universal and loyal consumers. Equally, Nyberg et al. (2018) detailed that performance-related pay encourages risk-taking activities among the staff. Members tend to endanger their lives in an attempt to increase their pay.

Available measures of performance, especially in the service industry, fail to consider all elements of production. This may result in unequal pay among the staff and supervisors (Nyberg et al. 2018). Members tend to receive the rewards and salary disproportional to their contribution and tasks rendered. For instance, in a call center, firms use the number of calls or time taken on calls or both to measure employees’ performance. However, the firms fail to consider the main factor that regulates production such as customer satisfaction. Practically, one employee may engage customers for long and fail to convince them while others take a shorter time to achieve the set target. As a result, the firm rewards a less productive employee as compared to the others. However, when implemented effectively, the approach results in some benefits.

There are a few advantages of merit payment. According to Nyberg et al. (2018), performance-related pay contributes to efficiency and creativity in a firm. Employees utilize the existing resources and time more effectively to increase their performance indicators. Also, they strive towards achieving higher units of production, which contributes to increased revenue for the firm.  A study that analyzed one of the companies producing glass indicated a 36% rise in production with the launch of performancerelated pay as discussed by Frey et al. (2013). Besides, the members apply innovative solution-based approaches to increase their production (Nyberg et al. 2018). These innovations aid in the optimization of existing resources that boost the firm’s productivity. Concurrently, since lower production translates to diminished pay, members work independently to achieve their targets in the timeline provided. As a result, the employee requires little supervision if any, which grants the managers and supervisors more time to concentrate on more productive core responsibilities that enhance the firm’s returns as opposed to overseeing daily activities. It, therefore, promotes hard work.

The approach encourages members’ dedication to the tasks assigned as well as help focus on the targets set. To increase the measurable units of production, members focus solely on the functions that directly help achieve the set mission. They avoid tasks that probably donot count in the outcome and are a waste of crucial time. Additionally, managers develop specific objectives for the staff to meet. Besides, the crew set their aspirations to define their target wages. These objectives help the firm, managers, and individual members remain focused on the primary goal. As a result, the firm achieves the set goals swiftly and increase production levels. According to Alfandi and Alkahsawneh (2014), incentives count as one of the prime contributors to firms’ production and returns and one of the attractive incentives among workers in an organization. As a result, performance-related pay encourages employees to work harder. It also helps retain productive employees. It further acts as a significant indicator in the measurement of performance and capability of the employees, which helps firms identify and retain crucial employees. 

Performance-related pay is an approach that rewards employees based on their input to the intended precise output. It relies on some theories like reinforcement and expectancy theories as well as microeconomic agents and principles. It, therefore, finds enormous application in profit-driven firms as well as task sensitive companies. Most private companies, therefore, embrace the approach in an attempt to empower and encourage high productivity to increase their returns. More public organizations seem to adopt the approach partially as a method to grant commissions, payments, and benefits. In particular, merit-based pay enhances production, efficiency, dedication, and focus on the set targets. On the other hand, it contributes towards undermining cooperation, unequal and biased pay, engagement in risk-based tasks, and compromises the quality of goods and services. The practical application of performance-related payment with the eradication of the drawbacks results in more productivity and higher pay for the employees, which highly motivates them as well as enhances their retention. Firms, therefore ought to embrace the approach and work towards decreasing the associated limitations and challenges.

References

Alfandi, AM & Alkahsawneh, MS2014,“The role of the incentives and reward system in enhancing employee’s performance ‘A case study of Jordan Travel and Tourism Institutions’,International Journal of Academic Research in Business and Social Sciences,vol.4, no. 4, pp. 326-341. Available from: <http://hrmars.com/hrmars_papers/The_Role_of_the_Incentives_and_Reward_System_in_Enhancing_Employees_Performance.pdf>. [25 April 2019].

Frey, BS, Homberg, F & Osterloh, M 2013,“Organizational control systems and pay-for-performance in the public service”,Organization Studies,vol. 34, no. 7, pp. 949-972. Available from: <Doi: 10.1177/0170840613483655>. [25 April 2019].

Larkin, I, Pierce, L & Gino, F 2012,“The psychological costs of pay‐for‐performance: Implications for the strategic compensation of employees”,Strategic Management Journal, vol. 33, no. 10, pp 1194-1214. Available from: <https://www.researchgate.net/publication/228215319_The_Psychological_Costs_of_Pay-for-Performance_Implications_for_the_Strategic_Compensation_of_Employees>. [25 April 2019].

Lucifora, C2015,“Performance-related pay and labor productivity”,IZA World of Labor, vol. 152. Available from: <https://wol.iza.org/articles/performance-related-pay-and-labor-productivity/long>. [25 April 2019]..

Nyberg, AJ, Maltarich, MA, Abdulsalam, DD, Essman, SM & Cragun, O2018,“Collective pay for performance: A cross-disciplinary review and meta-analysis”,Journal of Management, vol. 44, no. 6, pp. 2433-2472. Available from: <Doi: 10.1177/0149206318770732>. [25 April 2019].

Perry, JL, Engbers, T & Jun, SY 2009,“Back to the future? Performance‐related pay, empirical research, and the perils of persistence”,Public Administration Review, vol. 69, no. 1, pp. 39-51. Available from: <https://sites.duke.edu/niou/files/2011/05/Perry-Engbers-and-Jun-Back-to-the-Future.pdf>. [25 April 2019].

Reilly, T2013,“Comparing public-versus-private sector pay and benefits: Examining lifetime compensation”,Public Personnel Management, vol. 42, no. 4, pp. 580-604. Available from: <https://www.researchgate.net/publication/258697973_Comparing_Public-Versus-Private_Sector_Pay_and_Benefits_Examining_Lifetime_Compensation>. [25 April 2019].