Introduction
Pay for Performance is a form of incentive/reward system that focuses on the performance improvement of employees. Its main focus is on the employees’ incentives rather than rewards. One of the first successful pay-for-performance programs began in 1987 (Boudreau et al., 2019). It happened in a small bank in Canada where their CEO realized that workers who were first to recognize a fraud or error were being paid more than others (Boudreau et al., 2019). As a result, managers wanted to see an increase in productivity from their employees. Dr. Jack Welch, the General Electric (GE) chief of research, was pleased with the outcomes of his implementation of pay for performance programs at GE and other businesses. It is one of GE’s most successful programs because most employees in these companies are paid more because they have a higher level of trust.
Types Of Employee Compensation
The different types of employee compensation are merit pay, fringe benefits, and variable pay. Merit Pay is a form of employee compensation that rewards employees for their performance concerning job expectations (Hur, 2018). Merit pay can be used to achieve certain business objectives, such as increasing the organization’s productivity. It is also used to evaluate how well an employee has performed on the job. Fringe benefits are a form of compensation that provides employees with various benefits. These benefits include health, life insurance, retirement, and paid holidays. With fringe benefits, the reward bestowed on employees may be more diverse than that given to merit-based pay. Additionally, variable pay is described as a large number of different rewards given to employees for different reasons, including performance and productivity. Variable pay can be determined by salary increases and bonuses for performance (Hur, 2018). This compensation type can also include other forms of compensation, such as stock options or profit-sharing programs.
Measure of Effectiveness
The organization measures the plan’s effectiveness by examining employee behavior and performance changes. For example, the organization can compare the previous year’s results to determine the effectiveness of its pay-for-performance plan (Hur, 2018). The results are compared to the past year’s results, and upper management will examine each employee’s performance to determine if they have exceeded their expected goals. If one or more employees have exceeded expectations, they will be rewarded accordingly. Likewise, if one or more employees have not performed well enough to receive a bonus, they will not be eligible for a bonus because their performance was not good enough (McKinney et al., 2013). Other organizations measure their effectiveness by comparing their employees’ productivity before and after implementing the Pay for Performance (PFP) plan.
Merits And Demerits of PFP according to Employees’ Perspective
Based on employees’ perspectives, the pay for performance has advantages such as if a company is performing well, it will receive the benefits of PFP. The advantages of compensation plan also include that it gives employees motivation to work harder at their job by working for money. If a certain amount of work is done or goals are met each month, the employee can be given money in exchange for their hard work (McKinney et al., 2013). This will cause them to do more in return, which leads to higher production and better performance.
The other advantage is that it can also cause employees to stay longer at the company, helping their company grow and become more successful. PFP can allow an employee to earn more money and be more successful in life.
There are disadvantages that sometimes the managers might use to make an employee lazy, which is not good for productivity. One disadvantage of PFP is most companies will try to overpay you because they want more profits (McKinney et al., 2013). An example is that many companies will only indirectly evaluate how well each individual has done on their job by measuring the companies’ performance instead of directly evaluating each person’s performance.
Employer’s Perspective
Based on the employer’s perspective, the advantages of pay for performance are that it can help the organization increase its productivity which will increase its profits. The PFP assists increase productivity and positively affects employee morale since workers who have been successful in their jobs have high self-esteem. The most important aspect of this plan is that it focuses on performance rather than profit, so companies with higher productivity levels can survive and even thrive.
On the other hand, the disadvantages of pay for performance are that it can be a waste of money. Employee disengagement can cause this, which could result in a business or organization spending a lot of money on unproductive workers (Weibel et al., 2009). This could lead to favoritism, discrimination in the workplace which could further lead to poor performance among others. Another disadvantage is that the employees might not know how to use the tools and may not care about getting more out of their job. Since every industry has different needs and goals, companies can choose to implement different compensation systems determine as to what is optimum for their company. The best company’s pay-for-performance plan will fit the most harmonious environment of an organization (Weibel et al., 2009). In addition, an employer needs to understand that the idea behind paying for performance is not just one fixed goal. They should know that it instead evaluates an employee’s effectiveness on their work-related goals and rewards for exceeding those same expectations.
PFP Is a Good Strategy
Pay for performance is an excellent method of compensating employees for their performance in the workplace. The PFP has increased productivity, employee morale, and employer satisfaction. PFP can also be used as a way to enhance organizational success by focusing on employee performance rather than profitability (Weibel et al., 2009). Using the PFP method is beneficial because it can help reduce costs, increase production, and improve the overall quality of an organization’s products or services. Another major advantage to using pay for performance is that it allows for greater flexibility in adjusting compensation to budget changes and up-to-the-minute market conditions than previous systems.
According to Weibel et al (2009), incentives such as pay for performance and bonuses can have some good effects on employee motivation. This means they can be counter-productive in the long run by reducing morale. The bonuses and pay for performance can be seen as “short-term” as opposed to “long-term” motivation. Additionally, in the long term, having too many bonuses or pay for performance can negatively affect the workplace. The significant difference between short-term and long-term motivation is that employees will often work hard initially when incentives are present (Weibel et al., 2009). Nonetheless, they will not continue to work passed the deadline because of the perceived lack of long-term rewards.
For pay-for-performance to be effective, several factors should be considered before implementation. First, it is important to consider how much pay the employee is already receiving. For example, if the employee receives a salary of $12,000 and the PFP plan is paying an additional $1,000 for each month for a full year of work, it would be wise to calculate how much salary the employee could make per month from their PFP. This is simpler than working out how much they would need to earn with pay for performance to receive an equal amount of money (Weibel et al., 2009). In addition, there should also be a way by which you can monitor actions that can be taken concerning employees’ performance and will reflect positively or negatively on them. Although different companies have different ways of rewarding individual employees, it is important to consider how an employer and their company can find a way that will be effective in the end.
Conclusion
In conclusion, pay for performance is a good compensation system because it focuses on employees’ productivity and how much they can exceed their manager’s expectations. It also allows employers to reward employees for their hard work and dedication. It offers flexibility in determining worker pay and allows employers to adjust compensation to different budget changes or up-to-the-minute market conditions. Although pay for performance may have disadvantages over traditional compensation methods such as bonuses or raises, it is a fantastic way to motivate employees in the workplace and requires less administrative costs than other compensation methods. This system is the best since it fits all sizes of companies and with different styles, which results in higher employee satisfaction. Employee satisfaction leads to employee loyalty, which results in higher productivity and better quality of products.
References
Boudreau, Cascio, W. F., & Fink, A. A. (2019). Investing in People: Financial Impact of Human Resource Initiatives. In Investing in People. Society For Human Resource Management.
Hur. (2018). The unintended consequences of a pay-for-performance rule change: U.S. Department of Defense’s National Security Personnel System. The International Journal of Public Sector Management, 31(6), 654–671.
McKinney, Mulvaney, M. A., & Grodsky, R. (2013). The Development of a Model for the Distribution of Merit Pay Increase Monies for Municipal Agencies: A Case Study. Public Personnel Management, 42(3), 471–492.
Weibel, Rost, K., & Osterloh, M. (2009). Pay for Performance in the Public Sector—Benefits and (Hidden) Costs. Journal of Public Administration Research and Theory, 20(2), 387–412.