Performance Related Pay

All organizations have the common objective of being successful and nowadays due to competition that is not an easy achievement. The most important capital that companies have is the human capital and, to be successful, is essential for the organizations to focus on people.

Although the "pay" in "pay for performance" can refer to any of the more traditional components of reward programs, the organization should look beyond its current forms of compensation and consider whether additional approaches might work best in the long term.

A Performance-Based Pay system is an increasingly popular compensation method used by organizations to increase productivity. A goal for all companies is to try and remain competitive and control costs, this is a reason for performance-based pay systems becoming more popular. This type of system attempts to link compensation to performance. (Gena Richter, 2002) These systems are directly tied to organization or individual performance and are most effective when based on objective measures of quantity or quality of performance. If we wish to have a direct impact on work motivation, it must be linked directly to the performance of desired behaviors. In order for to put this type of system into place, performance evaluations must be conducted regularly , as well as training and development for those with performance that isn't quite up to par. These additional resources will be necessary for our organization if we implement a performance based pay system. (William B. Bernathy, Ph. D., 2004)

Performance based pay plans are becoming increasingly utilized by companies across all industries as they try to improve their productivity while limiting their costs and remaining competitive. An effective performance based plan allows an employer to distribute some of the financial risk and rewards of the business to the employees. The employer can keep base pay compensation below the market average while still offering employees the opportunity to make more money than what is offered at the high end of the market pay range. This leaves the employer less vulnerable to fluctuations in the economic environment by lowering the fixed cost of wages (Miller, 2011).

A well-articulated compensation philosophy drives organizational success by aligning pay and other rewards with business strategy. It provides the foundation for plan design and administration and anchors current and future plans to the company's culture and values (Kaplan, 2006, p.32). Recognizing and rewarding achievement is the cornerstone of the company A’s compensation philosophy. The mission of the company is to attract, select, place and promote all individuals based on their qualifications. The company believes that performance-based compensation helps attract, develop and retain talented professionals. In addition to base pay which based upon local market conditions and targeted to be above market, the company provides the following types of potential compensation to reward performance:

There are five major components of job satisfaction, one being monetary benefits (Ghillyer 2010). According to Ghillyer (2012) an employee’s behavior towards their pay may affect their work performance. The issue that arises with employee motivation is that management is unable to satisfy all (Ghillyer 2010). This becomes an even larger problem when employees being joining unions, resigning and being frequently absent (Ghillyer 2010).

It’s essential that managers understand their employees’ perceptions of the importance and fairness of the reward system and then clearly communicate what needs to be done

Performance is the strengths and opportunities identified in an employee that can be measured and communicated to an employee to encourage development. Through a performance management system, Laura can gain insights about her employees. In addition, it would help clarify the employees’ job definitions. A PM system can aid in enhancing employee development and competencies. Employee misconduct is minimized and administrative action becomes fairer. Thus, the PM system will help protect Laura from HR relate lawsuits. By measuring employees’ performance against her company goals, Laura can make clear her objectives and change the organization for the better (Southwell, 2015, Unit 1). In the article “A (Blurry) Vision of the Future: How Leader

Pivotal in that philosophy development is how and to what extent pay will be tied to specific types of performance.  This issue will not be treated the same in every organization.  However, every business should be able to identify certain performance objectives it wants its workforce to fulfill and the financial outcome that will be achieved if that result is attained.  Such a projection can be translated into an increased shareholder value figure.  (The VisionLink Advisory Group)

Human capital plays a considerable role in the economic environments. It is not cash, assets, but it is people, which are the critical differentiators of a business enterprise (Fiz-enz, 2000). It is an organisation’s possess individual tacit knowledge (Nelson and Winter, 1982). There are four factors involved by human capital: genetic inheritance, education, experience and attitudes about life and business (Hudson, 1993). All of these factors are intangible and can be invaluable. Human Capital is a source of innovation and strategic renewal, such as improving personal skills, re-engineering new process or just daydreaming at the office (Hudson, 1993). According to Figure 1 (Bontis, 1998), Human Capital is about the intellect of human. It is an internal control and development

Although research generally confirms that pay-for-performance plans can influence greater outcomes, it is unclear how effective different pay plans are relative to each other (Park, 2012). Like most things in business, compensation is something that requires evaluation, study, assessment, strategy, modeling and integration.  Achieving a pay for performance culture does not happen without paying attention to the behaviors, activities, rewards and motivations that have to be linked and reinforced through a well engineered and successfully executed process.  Actually if that process does not tie rewards to shareholder financial objectives, employ the proper mix of compensation elements, result in meaningful dollars, embrace performance that employees can impact and are effectively communicated and reinforced, then the results it produces will likely fall short (Vision Link Advisory Group, 2013).

Human capital management plays an important role in the recruitment process. It is essential for hiring, managing, training high performing employees. Human capital management is important for hiring the right talent, orienting him/her to the organization, making a new employee feel comfortable, training employees in order to constantly upgrade their skills, retaining employees and making employees self sufficient and prepare them for adverse conditions.

The definition of the term ‘performance management’ varies in different literatures. As Hutchinson(2013) summed up, combined with Den Harton’s theory(2004), it is a continuous process which links individual and team objectives with organizational goals by measure and improve employee’s skill and performance. According to Armstrong (2012), human resource management aims at making sure the organization has the most talented, skilled and engaged people in order to attain its goals. In this context, performance management is one staple practice helping managers identifying and retaining most competent employees as well as correcting poor performance.

Keeping employees motivated in addition to creating incentives and/or additional ways for employees to receive more compensation will create better performance overall within an organization. Contrary if company B gives their employees incentives to perform, without any motivational tactics they probably will not have as many top performances as company A, in addition the company may only seek short term rewards verses have long term success. Lack of motivation for employees within an organization, can cause long term damage for the company’s success. Different things motivate everyone; therefore there should be a system in place to keep employees motivated for the long term success of the company. In the MBM textbook under the concept of incentives, compensation, and motivation, there are a couple of different views of how it should be applied within an organization. We will discuss The Social Role of Profit, Personal Profit and Losses, and the way Market-Based Management view how incentives, compensation, and motivation should be applied and the things that effectively drive employees’ actions while at work.

Pay for performance is to link employees’ salary or salary increase to his or her performance. It seems to be a reasonable or attractive idea but it often does not work well in organizations. Please use at least 4 motivation theories or models to explain why pay for performance may not work as expected—particularly in government and nonprofit organizations.