Importance Of Organization For Greater Performance - Performance Related Pay

Performance Related Pay as a Method of Payment

Why Important Is Organization For Greater Performance?

Pay has always been a key discussion topic in any hiring process. The HR managers know the market value of each worker with respect to their experience & skills. All organizations have their own practice on how the employees should be paid. Some employers pay below the market rate, others make payments as per the market rate & still there are certain organizations that are willing to pay slightly above the market rate. The way every organization pays is closely related to the organization’s size. In last few years, there have been a lot of debates & arguments happening on how the organizations should pay their employees. Do organizations should adopt the performance related pay or do they continue to practice the traditional pay? (Beardwell & Claydon, 2007)

The modern Human resource management contended that Performance Related Pay is the method of paying employees; they believe new pay is the way forward & it could also be a method of motivating the employees to perform their job. 

There have been many arguments on what should be done regarding motivation. Some individuals believe that performance related pay is a motivational factor. However, other individuals believe that performance related pay is not a motivating factor.

According to Thompson (2009) Performance-related-pay offers people with monetary rewards in terms of cash bonus or increment in the basic pay which are connected to a performance assessment, generally in relative to agreed objectives. Performance Related Pay developed in the entrepreneurial 1980’s in order to motivate individuals & development of a culture that will be performance oriented (Drucker, 2008). It was viewed as a foremost lever for charge & the government implemented it with great zeal but less understanding as a way of altering public sector organizations into businesses. 

Since last few eras, schemes regarding pay basis performance have created remarkable amount interest however, very less in the way of decisive evidence regarding the impacts of employees on performance (Pfeffer, 2009).

Performance-related-pay is a process of paying employees on the basis of how they are performing. Performing better outcomes in more pay level for the personnel & personnel who are not performing well might outcome in decrease or no changes in the pay. Obviously as with any pay scheme there are pros & cons of such a system & I’ll be discussing the same with the help of this paper (Brown, Armstrong, 2009).

Factors Influencing Implementation of Performance Related Pay

Performance Related Pay is a method of rewarding personnel working in an organization for greater performance.

There are numerous reasons why organizations may announce this kind of pay system. They may:

• Be intense to retain existing employees
• Need to compete for new talent
• Be looking for a reasonable way of allocating pays.

 According to McAdams (2013) In order for PRP (Performance Related Pay) schemes, they must be grounded on measurable, vibrant targets contracted by both employee & employer. It generally discovers about these targets from the performance appraisal meetings & employment contract they has been made with respective mangers.

• Merit Based: This system includes the immediate manager undertaking an appraisal of work performance of each subordinate during the preceding year. The individual that is being apprised will be rated on their accomplishments during the complete year & this will match with the pay level for which they’ll be rewarded. Unluckily, this system is not much effective as the emphasis could be on current achievements, not on complete year. As an instance, if a staff member works remarkably hard & with great standard for the initial three quarters of the year, but suffers with an incident in his private life which decreases his productivity in the last quarter, this might cause appraiser to emphasis more on his current performance as divergent to the hard work done by him during the first three quarters of the year (Newton & Findlay, 2014).
• Goal Based: In this case subordinates & managers met during the beginning of the appraisal period & agree amongst them a list of aims which the subordinate will pursue to meet in the upcoming year. The subordinate is then rated on the basis weather he/she achieved those goals, & this score is then interconnected with the level of pay. A probable disadvantage of this approach would be that the employees might focus merely on what they believes permit them to attain the goal, hence overlooking rest of their work areas. A main advantage of adopting the goal based approach is that any organizational goals/aims would become the individual’s priority. This permits organizations to communicate their strategies in a way which clarifies for a person that he has to do to follow to it (Adams, 2015).

It has always been a matter of controversy to say that extrinsic rewards like performance-related pay really create motivation amongst the employees to perform better. It has been appealed that financial rewards generally have a limited duration of time with respect to their motivating influence (Fernie & Metcalf, 2012). Hence, extrinsic awards like performance related pay, even though they can exercise an enduring influence on performance, must be steady with complete objectives of management, so that performance based might not be dependable with, an instance, a pure strategy of reducing cost; solely be utilized to strengthen a motivational system in which intrinsic (non-monetary) awards exists, like goal settings, career development plans, opportunities for idea contribution, two-way communication, involvements/consulting employee while making decisions by the managers, training & reorganization of process of working(Thompson, 2012) .

• Performance pay should be negotiated because the criteria for measuring performance are inadequate, or the criteria are not certainly accepted, communicated & understood.
• The performance appraisal system is inappropriate because the objective of the appraisal system (such as where it proposed to recognize the requirement of training or appropriateness for the promotion) does not match the system of reward objectives. Actually, regular appraisal system must not be used to define the performance pay.
• The consistent feedback on performance is missing
• The system of reward is not aimed at meeting the objectives required to be attained.
• The right blend of intrinsic & extrinsic rewards is missing.
• The lack of a suitable substantial of pay that must be subject to the standards of performance. This arises when the amount that relies on performance is too little, or it’s too big & hence, the amount placed at risk (where there is a poor performance) is not acceptable to personnel.
• The periodic assessment of scheme is missing.
• Not recognizing the fact that performance, particularly profit, is occasionally reliant on on factors that are outside the employees’ control. For instance, recessions, exchange rates & management decisions (Ryals & Rogers, 2015).

2 advantages at the macro level have been appealed for performance related pay. The first relays to employment. If increment in basic pay is transferred to a profit related system, the organization might be more persuaded to hire new personnel as their cost of fixed wage would be less than the old colleagues. If the profit percentage needs to be shared remains fixed, an addition in the number of employees doesn’t cost more to the organization in terms of the PRP. On the other side, new recruitment will lessen the quantum, present employees will get unless profits rises & thus employees can become dissatisfied (Torrington, Derek & Taylor, 2015).

The other benefit is that rise in pays via performance based scheme would not consequence in inflationary propensities as such growths would often be the consequence of improved productivity. The benefit to employees & management are that:

• Personnel accrue higher earnings, where profits/performance increases.
• When there is reduction in profit, the decrease on the pay based on pay based on performance can safeguard personnel against severances.
• There is an enhancement in the employee identification with the business success.
• Disparities in the pay results in personnel becoming more acquainted with the misfortunes (or fortunes) of the business. This will rely on the practices of sharing information of the management (Luthans & Stajkovic, 2011).

Another issue with the performance based pay is that it could be difficult to measure. In few industries such as sales, job performance is simple to compute via sales revenue & quotas. However, it is difficult to measure the performance of a doctor or a lecturer. It is difficult to know if a customer care representative is completing his goals unless a manager is observing the representative the complete day. If it can be measured by customer complaints, then what will be the case where the customer was dissatisfied, however they never said so. The fact that sometimes performances is difficult to objectively asses & make performance-relate-pay challenging to fairly evaluated & might result in dissatisfaction & feelings of injustice in the office as an outcome (Homans & Thorpe, 2000).

Advantages of Performance Related Pay

Obviously, the instinctive thought is that individuals that perform superior must be remunerated more & utmost importantly that individuals that have worse performance than the individual performing higher must be awarded less. But, this rests upon the hypothesis that it is likely to be quantitatively measure performance, but obviously it is not.

According to Guest (2008) Performance based pay inclines to work best in the industries where it is simple to accurately assess the job performance & when the key component of the wage amount is the bonus. This case can be seen in the financial & banking industry, sales promotions & jobs of recruiting people. In such kinds of jobs, it is implicit that the performance based pay is the salary part & that performance should be sustained for the pay to be received. In such circumstances, performance based pay is accepted traditionally as much more goals in such industries. Yet, even in such scenarios, it is impossible to quantitatively measure (for instance, what comparative contribution to sale arrives from the marketing, excellent design of the product & the sale personnel?), so artificially objective measures are positioned on individuals like sales zones (Tamkin, Giles, Campbell & Hillage, 2014).

So, even though company desires to raise the motivation & productivity, what they mostly receive is fewer customers being satisfied & personnel using their inventiveness to work out how to operate the system instead of exercising on how to raise the customer value (Guest, 2009).

In rest of the industries, it doesn’t seem that PRP is an effective tool, because of above mentioned explanations. For many of the employees, money is not the main motivator, as reflected in Motivation-Hygiene theory by Herzberg dealing with work dissatisfaction & satisfaction. It could be difficult to measure the job performance in objective terms to make PRP adequately fair & just. Performance based pay could essentially result in job dissatisfaction for few employees that view disparity in system. Whereas this system might be successful for few, it is definitely not an efficient for most of the organizations (Wright, 2014).

• They overweight transactions (short term welfares) as contrasting to relationships (long term welfares)
• Substantial performance of the individual in a failing organization us under-rewarded & irrelevant performance of individual in an extremely successful organization is over-rewarded (Amabile, 2008).

In the particular instance, we must deliberate whether the organizations are trying to use pay incentives instead of better leadership & management. It the standards for work quality are clear & the work quantity which is distinctive for an employee who is fully trained then the organization can collect & analyse data to see what factors harm quantity/quality.

Disadvantages of Performance Related Pay

It has been applied a mutual proficiency- performance system where workers who validated both a competency of greater level (capability of handling more difficult/complex tasks) & meet the performance standards for quality & quantity grossed a higher pay rate. According to performance-related-pay system, personnel were assessed every ninetieth days & were provided with feedback. The detailed proficiencies which were keen to pay for were recognized by the management & trainings were provided to support the growth of the employees (Bratton & Gold, 2007).

There are few issues with the performance-related-pay such as

• There might be disagreements about how the performance should be measured & whether there have been enough hard work put in by an employee, so that he/she can be rewarded.
• Individually rewarding personnel does very less to inspire teamwork.
• It might cause unhealthy conflict amongst the supervisors.
• There are numerous doubts regarding whether PRP really does something for personnel motivation. This might be since elements of performance are generally a small percentage of total pay.

Is it possible for the organization to link individual performance & individual rewards for emerging a culture that is performance driven? A recent study conducted at Harvard is a pointer. Almost 90% of the winning organizations have closely liked performance to pay. Pay for performance could be a positive re-enforcer for organizational change (Thompson, 2012). 

Innovative PRP schemes are used magnificently these days by several proficient companies to generate performance oriented culture, facilitating growth & excellence as well as talent retention. There could not, obviously, be a prescriptive “best practice” approach. The correct process of rewarding is the one which are correct for a specific organization. Management practices, environment, climate & culture make a transformation. According to Lawson (2010), an involvement of such kind will moreover need the organization’s setting in place suitable safety measure & supports. In that experience from others comes in handy. Moreover, there are procedures accessible for determining as to what the most suitable exercise in a provided set of situations.

Structure, procedure & design are significant, however eventually the accomplishment of the approach would rely on how it is maintained, used, applied & introduced. There are various programs that deal with numerous aspects of developing an efficient performance based reward system which gives an opportunity to the employers to have an in-depth knowledge of performance-related-pay & its implementation issues (Guest, 2009).

According to Makinson (2010) "Performance Management can be described as the set of procedures by which a company manages their performance in line with their corporate strategy.”

According to Deathridge (2012), improved organizational performance is defined by all sectors, voluntary, public & private & to every company, global, national, local & small. Almost all the companies sat somewhere in their marketing materials or business plan that their employees are their most essential resources. It is sometimes interesting to see what shadows that statement in terms of reactions & actions- the practice in place for developing & managing employees & what the company rewards. The performance becomes better when employees resolve conflicts, solve their own problem, communicate better & use initiative. Leaders & managers could have a high impact on the performance of the staff & yet companies spend very less time on safeguarding that the leaders & managers are working & developing to their full potential (Suff, 2015). The researches have proved that traditional development & learning programs emphasis on managers having the correct skills & acquaintance in the technical/professional field, so they are able to manage, instead of the skills & knowledge needed to develop, lead & manager their personnel to complete.

Issues and Problems with Performance Related Pay

Performance management is a two-way assessment of the involvement of the employees to the company. It dynamically includes personnel in understanding what’s expected from them & provide valued feedback on the performance of the employee till date.

As already stated, the key benefit of PRP is that goals/aims of the organization become the individual’s priority. As per the theories, setting goals for a worker with clarity in reward at the end for attaining the objectives motivates workers more to try harder towards attaining their objectives (but this case is not always right). Higher personnel motivation will result from objectives which are not too challenging to accomplish & with the reward being apparent as useful. The advantage of this to the company is evident; the employees in the organization which are more motivated to attain the objectives of the company and develop the company more efficient & more productive (Guzzo, Jette & Katzell, 2015).

PRP also permits company to keep/retain the employees which are performing at the top, as it permits the company to raise bonus/pay for that specific set of employees for their hard work to lure them to remain with the organization. After attaining a more favorable pay level these hard working personnel are expected higher that they will try to reach a higher level, hence providing even more benefits for the organization.

Another advantage of giving the rewards with the pay to the personnel for their good performance denotes that they don’t have to promote in order to reward them. Providing rewards to the high achievers with promotion could result to the culture of the organization becoming too complex & full, causing less effective communication inside the company. Promoting extraordinary achievers might also not be efficient because company might turn out promoting an employee that’s not prepared or qualified for the new bigger responsibility. Moreover, having PRP permits the organization to retain control above the personnel (Armstrong, 2009). 

• It is suggested that performance appraisal is grounded on the goal setting instead of standard measures for a work. Performance grading must not be much comprehensive & must evade inflexibility. The aims agreed of the performance of an individual must act as a foundation for on-going dialogue all over the year amongst employee & manager. Comprehensive feedback on the appraisal commenced at the yearend must be given. Transparency in the complete process is the chief aspect in safeguarding its victory that eventually depends more on an effective performance measurement instead of payment distribution (Baker, 2013).
• The issues while implementing must be anticipates, this means that there should be mainly coordination with the unions & employees on the execution of performance related pay; the preparation of line & top management; clear expectancy of the budget required for; & the costs related to, performance related pay & of the means of funding performance related pay; & of the work & time.
• Little delegation of pay management & human resources is significant for an effective implementation of PRP. The reason is since there is a close link among the performance pay & goal setting. The more fruitful schemes seem to depend on a close incorporation of the above 2 functions, in comparison to more traditional models that inclined towards performance related pay against standard performance criteria. It is quite easy to coherent the objectives of an individual employee & those of their company in an expressive method if the local management has a degree of independence to adjust with the scheme to its individual requirements.
• Performance related pay is of secondary prominence as a management tool for improvement of motivation. Measures like flexibility in work organization, promotion possibilities or satisfying hob content come far before the performance pay in employee motivation. This substantiation points, thus, to the requirement for a broader tactic to improved performance management as against a narrower obsession with performance associated compensation (Marsden & Richardson, 2014).

Conclusion

Although PRP has a clear disadvantages & advantages it is not appropriate for all the organizations. Whereas it endeavors towards the independence of employee & a lesser amount of interference of manager, it always inclines towards the reverse. Disagreements in the organization would be mutual place as personnel will frequently view their own determinations as becoming more valuable in comparison of rest that are receiving more or large striking rewards than they are getting. The disharmony might result towards a company which doesn’t compete effectively, operate effectively & might not be capable of communicating well. However, it could be very effective, with all the personnel working towards the common objective of increasing the efficiency of the organization in all the fields (Kohn, 2013).

Conclusion

Performance-related-pay of performed out legitimately could be most effective; employees that achieve more will get rewarded & lead to higher commitment with the organization apparently staying on & trying to achieve even more rewards within the organization. Personnel that are unable to achieve their goals will not be provided with rewards & hence, it is less likely that they will continue working in the organization, making roadmap for probably more hard working personnel (Folger & Konovsky, 2009).

Human Resource managers are required to train the line manager to be capable of setting more specific goals; these goals should be measurable, achievable & realistic so as to avoid the bureaucratic injustice. Women too should be able to choose to say in performance relater pay or fixed pay unless provided that they are motivated. Each one of the employee should be capable of receiving a package which would suit their requirements. For women that choose performance relayed pay, it is the obligation of the human resource manager to ensure that their appraisal would be biased & fair.

Lastly, as the organization has a more diverse workforce, Human Resource managers must understand the culture of every nation & race. This will assist them in tailoring & making most efficient remuneration for every personnel (Kessler & Purcell, 2012).

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