Firms and business organizations and enterprises rely on their employees to achieve their objectives. As such there is need to ensure that the employees are equally motivated so that they can deliver on the said objectives. The business organizations and enterprises have the freedom of choosing from among several types of incentives. One of the ways of rewarding employees is using performance-based pay. In this case, employees are compensated or rewarded based on their work performance and their ability to achieve some set work milestones. Once the employees have achieved some objectives, he or she is rewarded which motivates the employee to work harder in future tasks. This type of pay has its advantages and disadvantages which help in establishing whether it is an efficient method of rewarding employees or not
The Strategic Importance of Performance-Based Pay
Organizations usually set some financial objectives, which should be achieved at a certain time frame. To ensure that the said objectives are met satisfactorily they employ various strategic approaches. One of the main strategies used in this case is performance-based pay where employees are rewarded based on their ability to meet certain objectives. The employees are hence motivated to achieve the set objectives with the aim of raising their earnings. The employees can get recognition, awards, bonuses, and other incentives such as free housing and cars once they achieve the set objectives. In doing this, the organization is set to benefit in financial terms, as the employees are willing to undertake numerous tasks to get the incentives. As a result, the employees become efficient and competitive creating an efficient organization, which meets it, business objectives.
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Companies, which make use of performance-based pay, do so in an effort to attract employees who have more skills. Employees are more likely to work in organizations which offer payments in terms of performance as compared to the ones that offer a one-time salary package (Boachie-Mensah, 2011). The reason for this is the fact that the employees see this as the best way of getting more incentives, which are not fixed. The employees, in this case, feel that they can decide how much they will get at the end of it as they have greater chances of getting more rewards. More so, such organizations can induce the employees to offer greater effort in meeting the objectives as compared to companies which do not embrace this kind of pay. In opting to pay the employees based on performance such companies reduce wastage in company resources Milkovich, Newman and & Gerhart, 2017). Employees can no longer afford to waste time in doing tasks that are not productive at the expense of the organization. Performance-based pay is an essential tool for ensuring that the employee remains engaged during the entire working period. In doing this, the company is at a better chance of achieving its organizational goals and objectives with much ease as the employees are more motivated to work
Advantages and Disadvantages of Performance-based Pay from an Employee’s Perspective
The employees are at the heart of any organization as they implement the company’s objectives. This being the case, they either are motivated to work more to achieve both personal and organizational goals or are put off by this type of incentive. Performance-based pay as a method of rewarding employees is commendable to some extent. According to Park and Sturman (2012), this kind of pay is flexible as the employee plays a role in determining the number of incentives he or she will receive at the end of the month. What this means is an employee who is self-driven can achieve greater financial advantage if he or she is willing to work for an organization. In this case, an employee has greater autonomy in determining the amount he or she takes home depending on his or her self-drive. According to Milkovich, Newman, and (2017), the incentives that come along in this type of pay are a major motivating factor, which keeps an employee, engaged. As a result, such an employee who is keen on getting the incentives work more efficiently, which offers him or her a chance of professional growth and development. In such a case, the employees explore various challenging tasks with the aim of accomplishing both the organizational and personal goals. Thus, an employee works at his or her optimum level to get the highest possible compensation. More so, performance-based pay helps employees to work better as a team especially in organizations, which have invested in giving departmental incentives and bonuses.
Performance-based pay apart from being a useful tool in helping employees achieve the much needed professional growth have various disadvantages. Most of these disadvantages emanate from the fact that it requires personal effort to benefit from such a method of payment. Employees who are lazy and who shy away from getting into severe challenges may find this kind of pay to be too demanding. Instead, they would have fixed pay, which is not dependent on their effort. More so performance-based pay tends to bring about many inequalities in the workforce. The hardworking employees keep on getting bonuses, awards, and other incentives while the less efficient employees become stagnant. Such inequalities can create tension in the working place, which could affect the efficient employees. Additionally, the employee may become more competitive to the extent that they may opt to make use of uncouth strategies to get the incentives, which may compromise on organizational goals. Furthermore, according to Rehman and Ali (2013), performance-based pay can be a source of conflict in the workplace especially if the organization fails to compensate its employees. Such employees may become demotivated and eventually lose interest in their work. In addition to this, this kind of remuneration has a downside in that it fails to recognize team efforts but instead focuses on individuals. Doing this discourages teamwork as each employee struggles to make it on his or her terms without group support.
Challenges Associated With Using Team Incentives
Organizations make use of teamwork in achieving their organizational goals largely. Teams offer a greater avenue of achieving the goals since they comprise of diverse individuals with varied skills, knowledge, and abilities In this regard there is an increase in the number of organizations which implement a compensation plan which rewards employees who engage in successful teamwork. Most of these companies have invested in various team compensation strategies such as profit sharing, incentive pay, and gain sharing. While this is an effective way of achieving organizational goals, a challenge comes in when determining how to reward team effort. According to Blumenthal et al. (2014), worker interdependence should be the basis for determining how the work is done should be compensated. In this regard, it is important to determine how each worker in the team affects the outcome of the work. The management may not determine in totality the right way of compensating group work in equal terms, which is a challenge in itself. The reason for this is the fact that not all team members have the ability to tackle difficult challenges and as such ride on the abilities and knowledge of other team members to achieve this success. However, on compensation, the organization may award all of the team members equally, which may create conflicts. The team members who played a significant role in achieving the tasks may feel underappreciated, and this may be a source of demotivation. Furthermore, there is a great likelihood that there are some team members who may quit along the way, making room for higher staff turnover. In this case, the management may not be in a position to determine the level of input by each member, which may come in the way of a rewarding team effort.
Ethical Perspectives About Performance-Based Pay
There are increased concerns regarding the effect of performance-based pay on employee’s ethical behaviors. Some individuals are of the idea that performance-based pay may make employees get involved in couth means of getting more incentives. What this means is that this kind of pay can come in the way of employees morality as they fight to get extra income. As such, the employees are turned into machines, which are keen on making as much money as possible through unacceptable means. According to Larkin and Pierce (2015), performance-based pay creates a lot of unnecessary work related competition which determines how the employees work and relate to each other. To outdo each other, employees may engage in unethical behavior to appear efficient to them management. Some of the employees may even go ahead and compromise the work of their colleagues to deter them from achieving their goals. At times the employees may put their personal financial needs before the organizational goals. In essence, they may seem to be working, but their mind is not set on achieving personal growth but rather financial empowerment.
Organizations which embrace performance-based pay risk increased conflicts among its employees. The reason for this is the fact that there are some employees based on the nature of their work and tasks can get incentives much easier while others take time before getting such incentives. As such, the employees whose nature of work does not allow them to get incentives much easier may build resentments and in turn become demotivated. In retaliation, they may opt to make the working conditions if their employees as tough by refusing to corporate or work together as a team (Ladley, Wilkinson and Young, 2015). Disgruntled employees who feel that the system consistently rewards some employees and leaves them out come up with ways to downplay the top performers. They can do this by sending negative reports to the employers or the clients who shift their attention to other companies (Larkin and Piece, 2015). More so, there is a great likelihood of manipulating information and data to get unmerited incentives. This is especially possible where production numbers are rewarded in place of quality. In such a case, the employees can hack the system and adjust the figures thus compromising on the quality.
In conclusion, employers can make use of several payment options to retain and motivate their employees. One of these payment strategies in performance-based pay, which rewards employees based on their output and effort. Performance-based pay makes use of incentives, bonuses, recognition among other alternatives. This type of pay encourages employees to work more efficiently to ensure that they have increased earnings. While this type of pay is commendable, it has its undersides. The undersides are usually visible when it comes to team works. Managers may not be in a position to determine how to compensate employees who work in team projects in a fair manner. Some employees may get improper benefits about their team effort, which may demotivate them. More so performance-based pay creates unnecessary competition, which comes in the way of achieving organizational goal. Disgruntled employees who feel left out of top performers may use uncouth strategies to frustrate their effort or get the benefits. As such it is important for management to ensure that performance-based pay is structured in such a way which provides fairness and equality if it is to be effective.
References
Blumenthal, D. M et al. (2013). Guidance for structuring team-based incentives in health care. The American Journal of Managed Care, 19(2), 64-70.
Boachie-Mensah, F. (2011). Performance-based pay as a motivational tool for achieving organizational performance: An exploratory case study. International Journal of Business and Management, 12, 270-285.
Ladley, D., Wilkinson, I. & Young, L. (2015). The impact of individual versus group rewards on workgroup performance and cooperation: A computational social science approach. Journal of Business Research , 68(11), 2412-2425.
Larkin, I. & Pierce, L. (2015). Compensation and employee misconduct: The inseparability of productive and counterproductive behavior in firms. Retrieved on 10 March 2018, from https://apps.olin.wustl.edu/faculty/pierce/larkinpiercepost.pdf.
Milkovich, G., Newman, J., & Gerhart, B. (2017). Compensation ( 12th Ed.). New York: McGraw-Hill.
Park, S., & Sturman, M. C. (2012). How and what you pay matters: The relative effectiveness of merit pay, bonuses, and long-term incentives for future job performance . Compensation and Benefits Review, 44(2), 80-85.
Rehman, R. & Ali, M. A. (2013). Is pay for performance the best incentive for employees? Journal of Emerging Trends in Economics and Management Sciences (JETEMS, 4(6), 512-514.
