1.Identify the advantages and disadvantages of Performance related pay from both theoretical and practical Perspectives.
2.Identify a performance related pay scheme in your Organisation or an Organisation with which you are familiar and clearly Identify its Aims and Objectives.
This report comprises of an in depth analysis of performance related pay scheme being practiced in ABC Corporation. The purpose of this study was to understand how the performance related pay schemes are formulated and implemented in the organizations and how effective they are in terms of the objectives set for the scheme and the organization’s growth and development. We have performed a case study on ABC corporation in Qatar. It is a manufacturing organization based in the State of Qatar and this organization has been practicing performance related pay scheme for a few years now. With the help of the employees, management and implementing bodies of ABC corporation, we have studied the reasons that motivated them to adopt this payment scheme, the objectives and aims of this scheme as per the organization and how the performance of the organization and its employees actually measures up against the expected results from this scheme (Silva, 2012).
The performance based payment system is when the employees are compensated on the basis of the work that they do. It can be based on the individual or group performance. In an organization practicing this pay system, there are no fixed salaries and the individuals are paid on the basis of their performance or the achievement of their targets. Therefore, instead of compensating on the basis of the employee positions, the employees are paid according to their contribution done either individually or in a group (Potemski & Rowland, 2011). This is mostly done to motivate the employees to perform better and in this system, the payment is done on the basis of the productivity of the employees. This payout structure attracts performance oriented individuals and the people with the right zeal and motivation have a lot to gain from this. Jack Welch of General Electric successfully implemented this payout method in his organization. At General Electric, they had devised a performance matrix which measured and rated the employee performance and the rewards were given on the basis of that. The top performers enjoyed the highest payouts, the middle performers were given adequate pay and the non-performers had to face consequences as dire as elimination sometimes (Bryson, et al., 2011).
For this analysis, we have critically reviewed the performance based reward and pay practices of ABC corporation. In order to do this, we have interacted with the people from the organization and gained knowledge about how the scheme is implemented and what are their yardsticks for performance measurement. We also interacted with a few employees of the organization and tried to find out how they rate and review the scheme and how satisfied they are by the methods of performance analysis being performed and the rewards associated with it. We then reviewed the aims and objectives of the reward scheme and understood what the management expected to achieve by the implementation of this scheme and how the current performance of the employees as well as the organization measures up against it (Lazear, 2000).
Performance related pay scheme
When the financial compensation is provided to the individuals on the basis of their job performance or target achievement, it is called performance based pay scheme. For the implementation of this scheme, it is important that the organization is able to quantify the objectives and the performance measurement system is fair and communicated to every individual. The performance is evaluated on the basis of some predefined objectives and target achievement and the employees are compensated on the basis of that. Performance related pay scheme is not a new concept. It has been in the system since very long, and various organizations have completely or partially adopted it over time. In ABC corporation, the work done by the individuals is generally skill based and the productivity of the employees can be easily determined on the basis of the work done. This way, ABC corporation is the ideal setup for the application of performance based payment scheme. In ABC corporation, the employees are not compensated on the basis of the organizational hierarchy or seniority, it is done on the basis of their performance and their productivity. The criteria for evaluation of the performance of each department is predefined by the organization and the payout is done on the basis of percentage achievement of the given targets. The individual performance is taken into account for this evaluation and irrespective of the position of the employees, the compensation is done. The ABC Corporation is a manufacturing organization (Suff, et al., 2007). Thus the top management is rewarded on the basis of the performance of the organization as a whole. The units manufactured are measured against the pre-set manufacturing target of the organization and the comparison is done. The payout is then done on the basis of the calculated performance.
There are certain rules that are set for the payout and these need to be followed while implementing the performance based payout scheme. There is a fixed minimum wage for the employees to ensure legal compliance and fair wages policy. Although very less, this minimum wage is to be paid to the employees irrespective of their performance. This is done not just to prevent the organization from legal repercussions, but also acts as a safety net against any contingencies or unforeseen situation that may arise with the individuals. The target is communicated top down in the organization. The organizational target is broken down among the various departments and the departmental target is distributed among the individuals. This is done at the beginning of every month so that the individuals have a clear idea of what is expected from them and what is to be done. The trainees, newly joined and the people undergoing departmental change have a lenient performance measurement criteria and are judged accordingly (Solmon, 2001).
A number of researches and organizational studies have established that the performance based compensation method leads to demotivation and deteriorates the employee performance. The researches have, however, stated that this compensation method can work well with the organizations performing mechanical task. ABC Corporation being a manufacturing organization is well suited for this payment and compensation method. The performance of the employees here can be analyzed objectively and clearly and thus it is going to be beneficial for the organization in the long run as the low performers are eliminated and the top performers improve the efficiency and the overall organizational performance. In order to make the performance based compensation work for the organization, there are certain things that the organization and the management must keep in mind. The first and most important factor to be considered is that the criteria for performance analysis must be clear among the management, performance evaluators and the employees. There must be a detailed and comprehensive discussion and communication over the performance evaluation criteria (O’Donnell & O’Brien, 2011). The next point that must be kept in mind is that the rewards for the goal achievement must be proportionate to the work done. The employees must not feel cheated and the demand of the job must be equivalent to the monetary reward associated with it. The evaluation must be done in a transparent manner and the employees must be checked with, for regular feedback and suggestions for the improvement of the processes and evaluation criteria. Individual performances must be analyzed if needed bust equal importance must be given to teamwork and working as a group. The performance based compensation scheme can be used to improve the organization’s efficiency, increase job satisfaction level of the employees, increase their commitment to the organization and increase their trust in the organizational management when used effectively (Anderson, 2007)
Money is seen as the biggest incentive among the workforce. Thus, performance based compensation scheme is well received by various organizations and individuals. The simple measurement and payout criteria makes the working of the organization more efficient an promotes a healthy competition among the individuals. The management of the organization can enjoy a more efficient organization and a driven workforce. There are numerous benefits of performance based pay structure and its implementation in an organization. The employees who work more, enjoy higher payouts and are satisfied (Barbosa, et al., 2014). This keeps the top performers happy and motivates the others to perform better. Overall, the implementation of performance based compensation system is beneficial and profitable to the organization. The performance evaluation and promotion criteria of the organization becomes transparent and no favoritism practices can be followed or complained of. The good performers enjoy increased revenue and for the organization, there is no burden of paying high salaries to non performers. The organization practicing performance based payout scheme will attract the right kind of talent and only the people who are good performers will be able to sustain. This again benefits the organization as it automatically improves the organizational performance (Jeyasutharsan & Rajasekar, 2013). The individuals will account for a higher satisfaction level and the payout scheme will motivate them all. An argument against the performance based employee compensation method is that the performance of the employees and its judgment varies from one person to the other. While one person may rate the performance very high, the other person may find the same performance to be average, or even poor. However, in a manufacturing organization like ABC Corporation, the performance measurement criteria are very objective and simple to measure. Thus, no bias or favoritism can creep in the performance evaluation for this organization (Stabilet, 1999).
The performance based compensation method is very effective for the organization and its financial health as it reduces the stress on the organizational funds. The organizations that are small and have a limited availability of finance can adopt this payment and compensation method as it doesn’t strain the organization and its financial health. There are various versions of this payout scheme like performance based pay, where the entire salary of the individuals is based on the performance. Performance based incentives, where in addition to a fixed salary, the employees are given incentives based on their performance. Profit sharing, where the employees are given salaries proportional to organization’s earned profits (Saari, 2013). Employee stock ownership, where the employees are the owners of organization’s sticks and their payout fluctuates with the organization’s stock prices. Performance based promotion, where the employees are promoted to the next level of the organization on the basis of their performance.
Although the benefits of the performance based payout scheme are many, there are a few disadvantages of this method of compensation that cannot be ignored. The individual performance analysis is a great way to judge the performance of the individuals, but this practice leaves little room for organizational learning and employee development. The individuals are focused on the productivity and performance all the time and the learning and skill development of the individuals is generally ignored during this. Another drawback of this system is that the entire focus of performance evaluation is on the individual performance and teamwork in the organization is overlooked (Convention & Bureau, 2008). Every organization needs to work as a team first in order to achieve heights. The employees in an organization following performance based compensation method only care about their individual performance and target achievement, unless the performance is analyzed at a group level, which comes with the challenges of its own (Harvey-Beavis, 2003). A group based performance evaluation judges the performance of an entire group and all its members are compensated equally. Now in a group, all the members perform according to their own capacities and capabilities. When the top performers of a group are compensated equal to the low performers, there is a dissatisfaction among the employees. This takes the form of inefficiency and the performance of the entire organization is impacted due to this. Another disadvantage that comes with a performance based payment method is that the individuals and their performance need to be continuously monitored. The entire method of observation and documentation of employee performance and keeping a record of it is time consuming and resource consuming. Along with this the employees are also given a feedback of their performance and this makes the process even lengthier (Eckert, 2010).
We interacted with a few employees of ABC Corporation and also found out that a few employees had partial or no knowledge of the performance evaluation criteria and method. As a result, there was dissatisfaction and frustration observed among the employees. They find the criteria vague and unfair and feel that the supervisors favor certain employees in the organization. The performance based compensation method must be used to identify training needs and suitability of the employees for promotions and not just for the compensation and payment of wages (Lavy, 2007). Another disadvantage of the performance based evaluation is that the complex and engaging task that involves various steps and actions is reduced to a single measure. The performance of the individual is boiled down to a single performance criteria. The quality of work is overlooked for the quantity of the work to be done and this degrades the total worth of the organizational work. The senior level employees who were getting paid according to their seniority are now being graded purely on the basis of their performance (Xerox Corporation, 2012). This is going to make the low performing senior employees dissatisfied and might even increase the organization turnover. The organizational costs might also increase if all the low performers leave and the high performers are left with it. The employees working in organizations that are practicing performance related compensation method often complain of organizational and work related stress. Although this system motivated them to perform better and be more productive, this lays an additional stress on the individuals and not just of performance, but also of being monitored continuously. This results in decreased job satisfaction levels for the individuals and the stress also ultimately results in lowering the productivity of the employees (Kecskes, 2014).
In this report we have studied the performance based payout scheme being practice in ABC Corporation of Qatar. It is a manufacturing organization based in the State of Qatar which has been practicing performance related pay scheme since a few years now. With the help of the employees, management and implementing bodies of ABC corporation, we have studied the reasons that motivated them to adopt this pay scheme, the objectives and aims of this scheme as per the organization and how the performance of the organization and its employees actually measures up against the expected results from this scheme. We have interacted with the people from the organization and gained knowledge about how the scheme is implemented and what are their yardsticks for performance measurement. We also interacted with a few employees of the organization and tried to find out how they rate and review the scheme and how satisfied they are by the methods of performance analysis being performed and the rewards associated with it. When the financial compensation is provided to the individuals on the basis of their job performance or target achievement, it is called performance based pay scheme. In ABC corporation, the work done by the individuals is generally skill based and the productivity of the employees can be easily determined on the basis of the work done. This way, ABC corporation is the ideal setup for the application of performance based payment scheme. For doing this, the units manufactured are measured against the pre set manufacturing target of the organization and the comparison is done. The payout is then done on the basis of the calculated performance. Money is the greatest driving force for an individual and this has been proved by various tests and studies, therefore performance based compensation scheme is very well received by both organizations and individuals. The simple measurement and payout criteria makes the working of the organization more efficient an promotes a healthy competition among the individuals. The employees who work more, enjoy higher payouts and are satisfied. This keeps the top performers happy and motivates the others to perform better. The organization practicing performance based payout scheme will attract right kind of talent and only the people who are good performers will be able to sustain. The organizations that are small and have a limited availability of finance can adopt this payment and compensation method as it doesn’t strain the organization and its financial health. Although the benefits of performance based payout scheme are many, there are a few disadvantages of this method of compensation that cannot be ignored. The individuals are focused on the productivity and performance all the time in an organization practicing performance based compensation method and the learning and skill development of the individuals is generally ignored during this. The individual performance is valued and monitored and teamwork in the organization is mostly overlooked. The performance based compensation method must be used to identify training needs and suitability of the employees for promotions and not just for the compensation and payment of wages. Another disadvantage of the performance based evaluation is that the complex and engaging task that involves various steps and actions is reduced to a single measure. Thus we conclude that there is a lot that goes in the making of a compensation structure of an organization and ABC Corporation is although implementing the performance based pay method well, there is still a scope for improvement in the practices that must not be overlooked
Anderson, R., 2007. Performance Based Pay, Available at: https://www.ais.sa.edu.au/__files/f/2129/Performance%20Based%20Pay%20Discussion%20Paper.pdf
Barbosa, K., Bucione, A. & Souza, A., 2014. Performance-based compensation vs. guaranteed compensation: contractual incentives and performance in the brazilian banking industry. Economia Aplicada, 18(1), pp. 5-34.
Bryson, A., Lucifora, C. & Pérotin, V., 2011. Paying for Performance: Incentive Pay Schemes and Employees' Financial Participation, Available at: https://cep.lse.ac.uk/conference_papers/26_05_2011/pellizzari.pdf
Convention, D. & Bureau, V., 2008. Performance-based Incentive Compensation Plan, Available at: https://www.dcvb-nc.com/cr/DCVB_Performance-based_Comp_Plan.pdf
Eckert, J., 2010. Performance-based compensation: design and implementation at six teacher incentive fund sites, Available at: https://www.niet.org/assets/Publications/performance-based-compensation-tif.pdf
Harvey-Beavis, O., 2003. Performance-Based Rewards for Teachers: A Literature Review, Available at: https://www.oecd.org/edu/school/34077553.pdf
Jeyasutharsan, U. & Rajasekar, N., 2013. Building performance based pay culture for better business results. IRACST- International Journal of Research in Management & Technology, October, 3(5), pp. 1-5.
Kecskes, A., 2014. Performance based compensation – a practical guidance on remuneration of corporate executives, Available at: https://cejsh.icm.edu.pl/cejsh/element/bwmeta1.element.desklight-ca110159-50ed-4c6f-b424-198554d70ff0/c/Performance_based_compensation_....pdf
Lavy, V., 2007. Using Performance-Based Pay to Improve the Quality of Teachers, Available at: https://files.eric.ed.gov/fulltext/EJ795876.pdf
Lazear, E., 2000. Performance Pay and Productivity. The American Economic Review, December, 90(5), pp. 1346-1361.
O’Donnell, M. & O’Brien, D., 2011. Performance – based pay in the Australian public service: employee perspectives, Available at: https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.452.3596&rep=rep1&type=pdf
Potemski, A. & Rowland, C., 2011. Performance-Based Compensation Structures: Considerations for Individual, Group, and Hybrid Programs, Available at: https://www.ride.ri.gov/Portals/0/Uploads/Documents/Teachers-and-Administrators-Excellent-Educators/Performance-Based-Compensation/CECR-Performance-Based-Compensation-Structures.pdf
Saari, O., 2013. Performance-based compensation for white-collar workers and firm performance, Available at: https://epub.lib.aalto.fi/en/ethesis/pdf/13482/hse_ethesis_13482.pdf
Silva, S., 2012. An introduction to performance and skill based pay systems, Available at: https://www.ilo.org/public/english/dialogue/actemp/downloads/publications/srspaysy.pdf
Solmon, L., 2001. The pros and cons of performance based compensation, Available at: https://faculty.missouri.edu/~podgurskym/wp-content/uploads/2001/art2001-10.pdf
Stabilet, S., 1999. Motivating executives: does performance-based compensation positively affect managerial performance?, Available at: https://www.law.upenn.edu/journals/jbl/articles/volume2/issue2/Stabile2U.Pa.J.Lab.&Emp.L.227(1999).pdf
Suff, P., Reilly, P. & Cox, A., 2007. Paying for Performance: New trends in performance-related pay, Available at: https://www.employment-studies.co.uk/system/files/resources/files/mp78.pdf
Xerox Corporation, 2012. ABC: Achievement-Based Compensation, Available at: https://www.xerox.com/downloads/services/brochure/federal-achievement-based-compensation.pdf