Issues Related To Pay And Performance: Theories, Empirical Evidence, And Failures

Pay For Performance

Discuss about the Issues Related To Pay And Performance.

Pay for performance has become an important way of improving the productivity of workers. It is a paid system where wages are paid according to how the workers perform.Paying a worker according to his performance will exert more effort by improving productivity. According to Lazear, productivity of the installers of Safelite Glass Corporation increased when the wages were increased. Dickinson also showed that the productivity of workers in the laboratory increased when they were paid according to their performance. The production of knowledge through experimentation is known as innovation. The author in this paper stated that the incentive scheme is always effective for motivating employees.

The interaction between workers and employers forms the labour market. According to the Neoclassical Economists, price and quantity of the labour market is determined by the forces of demand and supply  (Meade 2013) . The total number of hours which the employees wish to work at a given wage rate is known as Labour supply. It mainly functions with the interaction of employers and workers. In the labour supply market the trade offs is expressed with the utility function between income and leisure time from the time used in labour. The graph shows trade off between leisure and income generating activities.

Efficiency wage theory states that with the increasing wage the labour productivity also increases in terms of reduced shirking and flexible wage system. In order to encourage higher output and raise the productivity of workers, higher market wage is paid. There are number of reasons behind why the managers pay efficiency wages to the labourers. One of the reason is to avoid shirking. When the workers are paid higher wages, they have greater motivation to do their work. Paying efficiency wages also reduces labour turnover rate (Weiss 2014). The workers will be more loyal towards the company and thus the unemployment rate will be reduced. When the firm pays higher wages, they can also hire workers of good quality. Therefore, efficiency wage theory states that the workers productivity is positively related to the wages. Efficiency wage theory also supports the pay for performance model. Therefore, efficiency wage is the wage is the kind a of wage which the firm keeps above equilibrium so that both the profits and productivity of workers increases. As the wage is higher, this will motivate workers to produce quality work, increase its productivity attract skilled workers and will also reduce employee turnover. The model can therefore be explained with the help of different sub models such as:

Theories On Pay Versus Employment

Shirking model: When higher wages are paid to the workers, they do not leave their job as the cost of   leaving their job tends to become higher which works as an incentive for the employees and they do not shirk. As it is very difficult to measure both the quality and quantity of the workers effort, there should be an incentive for the workers to shirk. Therefore, in this situation an efficiency wage is paid on order to increase the cost of job loss. In the competitive market when there is no unemployment they workers are paid their reservation wage (Weiss 2014). When there will be full employment and imperfect monitoring workers can choose to shirk because it has zero costs and therefore it also save efforts. Now, if a firm wants to reduce shirking will pay an efficiency wage in order to inflict a cost on those workers who will be found shirking.

Labour Turnover : When workers are paid wages higher than the usual or from other firms , they avoid quitting their jobs which in turn decreases firm’s turnover rate. The firm will therefore save the cost of hiring new workers and training them. When wages are paid higher than the  ongoing market wage, the worker will not look for job elsewhere. This method is quite useful because training new workers is quite expensive.

Adverse Selection model: In this theory work performance depends mostly on ability to do the work. If the reservation wages and the ability to work is positively related, then it is referred to as adverse selection. Firms will be able to attract more better quality  job seekers by providing higher wages. In order to attract workers of high quality employers should py wges ab ove the market clearing rate as good quality workers will demand a higher wage than the poor quality workers.

Nutritional effects: when  workers are paid efficiency wages , they can lead  a quality life and take care of themselves and in this way their efficiency will also increase. Therefore in  developing countries, when firm pay more to the employees they can eat well and also are able to work harder. When workers health  becomes better employers also benefits b ecause healthy workers an d work m ore than the workers who frail in health. Therefore, wages above equilibrium level will increase pouctivity.

This case study shows that wage differential can impact business itself along with the performance or turnover of the workers. The following research study is done on TESCO, a retail sector in UK. It has been seen that it is much more profitable for the non union firms to offer wages to the workers above market clearing levels. By hiring better employees and motivating them to perform better can increase efficiency(Google.com 2018). The pay structure of TESCO has been reviewing since the year 2010. While conducting an online survey in 2011 it was seen that the workers who were paid more performed better. While the bonus were not same for all the employees, it was seen that most of them were demoralised and demotivated to perform well. The outcomes of The Express pay and bonus, of TESCO shows that the sectors that  pay more have huge investment strength, have large dimension companies  and also experiences higher growth. By conducting surveys it has been noticed that if   the pay structure of the employees changes there will be more job creation and future growth. When the hourly wages were low the workers seemed to be dissatisfied and discouraged by looking at the unfair bonus structure.

Neoclassical Labour Supply Theory

The shirking theory states that in order to stop workers from shirking firms pay higher wages. The empirical case study of the manufacturing sector of Singapore supports the efficiency wage theory. The data used for this study is taken from Annual report from the Census of Manufacturing Activities published by Singapore Economics Development Board and it covers around eighteen manufacturing industries of Singapore. Using OLS estimator it was found that the coefficient of relative wages were significant(CHUA et al. 2014). The results indicated that efficiency wage theory supported the wood, paper, non- metallic  and leather industries. The econometric evidence performed therefor supported the effici3ncy wage theory of these industries. In paper and fabricated metal industries the number of managerial staffs were low compared to the production workers. The ratio was 0.06  in the metal industries and 0.3 in the metal industries compared to 0.9for the manufacturing sector. This supports the efficiency wage theory as with efficiency wage in effect the need for  relying on supervisory monitoring becomes less. The government also has been promoting progressive  wage system for low class labourers so that high wages cost forces the employers to better utilize the workers.

Incentive compensation motivates workers to perform well. This is the reason why firms pay efficiency wages to the employees. However, there are lot of factors which results in failure of pay for performance.

One of the reason can be the company may have poor employee performance evaluation process. Most of the companies find it difficult to evaluate employees performance(Constructionexec.com 2018). The evaluation measures for each position needs to be meaningful. Another factor could be that the best practises does not exist. If the company  has insufficient “best practises” in their respective field , then implementing pay for performance will not alone change. Although the employees may work hard , the business strategy of the companies will still remain flawed. The third reason why implementing pay for performance did not work out is performance of a company is only measured by profitability alone. Although the common measure of success is based on financial measures, however this is not the most complete measurement. Customer service, safety of the employees, quality of work are very essential  for long term success and profitability.

The salary payment system which is based  on the pay band and according to their performance is referred to pay for performance. The three basic functions of  appraisal of performance is providing enough feedback according to each person’s performance, changing in behaviour towards working habits which are productive and providing data to the managers from where they can judge the workers performance( Ederer and Manso 2013).  Therefore, the pay for performance plans will help company to recruit employees of highest quality, rewarding performers for lot of successful achievements and for engaging employees for company’s success. Three key ideas of evaluating performance are

Efficiency Wage Theory

Determining Expectations

One of the requisites for evaluating a performance is to determine certain expectations that a worker must meet. Workers should have a clear guide  by which they can measure their performance throughout the evaluation period. When the employee’s job function is known it makes the process of evaluating much more easier and evaluative for the worker who know what kind of standards are to be met.

Quantification

Another way of evaluating an employees performance is by establishing ratings such a as average, above average or below average performance. The employees must meet these ratings so that the managers are able to properly judge the employees and can avoid any type of biases while doing so.

Feedback

The evaluation should be used in providing feedback to the employee so that they can learn about their performance and  improve them in future. Therefore, when the employees are lacking in some area the experience of feedback will help him evaluate and the need to improve continuously.

The remuneration awarded to the employees for the results rather than for  time worked is known as incentive pay. Some of the key ideas of incentive pay are :

Employing proper mix of compensation element: one of the biggest mistake the company does is that not striking a balance between short term and long term incentives. In order to create proper salary, bonus and equity the company should evaluate their compensation effectively.

Incentive plan should also be fair enough so that it relates to pay for performance. Is should n ot have any kind of biasedness towards any worker and should be transparent

Lastly, a well designed incentive structure will also motive employees to work more and perform better as the compensation system of incentives is one of the powerful motivators. Therefore, unless incentive structure is designed carefully they can cause more problems than solving it.

Conclusion

The report therefore suggests that efficiency wage thus relates to pay for performance and employees should be paid more in order to motivate them to perform well. Compensation therefore, requires proper evaluation, study and modelling. The three basic key ideas states how the performance should be evaluated and how should the incentive structure be made. Lastly, the two empirical evidences of the research study also shows that  companies that adopted efficiency wage structure has performed far better than the others.

Reference List

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