Performance-based pay is a form of payment that ties directly on the performance of an individual in meeting specific objectives and goals of the business. In most cases, managers as well as employees design a performance plan to which the employees will be considered responsible. Eminently, the performance-based pay designs and frameworks have been known to change an association into an outcome driven culture. Numerous organizations are turning to compensation arranging procedures and administrations to deal with pay while expanding investor value and corporate profits. The workers are paid if they accomplish the particular outcomes that were set and remunerated considerably more to exceed the fundamental desire.
The establishment of performance-based pay has several advantages on an organization. Firstly, they improve the employees’ performance by tying their performance to an individual, divisional or group (Baron, 2014). Employees are driven by the end result or compensation for their performance. The employees are also able to control their destiny as well as motivated to work as they wish to be compensated. Secondly, performance-based pay improves employees’ retention. Those employees that are not able to achieve the set goals are encouraged to leave while those that are qualified and motivated to deliver are retained to offer the service. Besides, performance-based pay makes administration easy and it is easily understood. The performance approach is straightforward inferring that either the worker performs unmistakably to the set principles that were expressed from the earliest starting point. The workers can ascertain the coveted rate of pay and persuaded to achieve the objective.
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From the workers' viewpoints, there are different real points of interest and burdens of the distinctive types of performance-based pay, for example, incentives, merit, recognition and earning at risk. Merit pay is a way to deal with remuneration that rewards the most noteworthy performing workers with extra pay. Merit pay empowers competition among the workers and this will be resolved in view of performance.
Moreover, it additionally enables the workers to see where their expansion falls in the merit pay ranges shaped by the organization. This, in the end, fortifies the practices and activities of employees in an association. The employees can take in the majority of their commitments and activities in the organization that are generally valued. The significantly favorable circumstances of merit pay are that it empowers the employer to separate between the performance of high and the low performing representatives and therefore remunerate the execution of the higher performers.
Furthermore, the compensation likewise empowers the business to assess the performance of the organization in general through the execution and commitments of a person. Merit pay additionally gives a vehicle to a business to perceive singular performance on a one time premise. Then again, merit pay has different impediments on the businesses. To begin with, bosses find it difficult to separate the performance of different workers to figure out who deserves the merit pay and this can bring inclination and favouritism among employees prompting disdain ( Milkovich et al., 2017 ). The most alluring commitments and achievements of employees are not quantifiable and the employer conclusion remains constant. The most desirable contributions and accomplishments of employees are not measurable and the manager opinion remains constant. Secondly, the amount of time and energy that the organizations invest in an attempt to make the performance measurable for merit pay can be better spent on delivering services to the customers.
Regarding recognition, recognizing the effort and accomplishments of employees motivates them and encourages them to consistently perform at the highest levels or maintain the newly achieved levels of performance. It also opens door to reward for creativity, hard work and loss prevention at all levels of the organization. Besides, recognition makes employees happier making them maintain higher productivity levels in the organization. Conversely, recognition can lead to bias and favouritism which can create factions and discords within the workforce. Recognition can also stiffen the continued willingness of the workers to excel when it is done ones per year. Recognition can create a sense of entitlement and therefore employee rewards must be progressive to continue being effective.
Based on the perspectives of the employees, an incentive as a form of performance-based pay has various advantages and disadvantages. Firstly, it is an easy and straightforward way of rewarding the employees who deliver the high level of output as well as influencing the behaviours of employers. Secondly, incentives boost the employee morale. In most cases, almost every employee wishes to be recognized and rewarded for his or her performance and will prompt them to work hard to gain more benefits. Furthermore, incentives improve the work atmosphere by providing employees with a feeling that their work is getting noticed and will be paid for their accomplishments and achievements. Incentives further provide an element of control to the employees.
The employees are able to control over their level of income and therefore work hard to improve their overall level of earnings. Incentives are a great tool that employers use in recruiting new employees. Recruiters can brief job seekers about the incentive plans of the organization which will eventually attract them to join the organization. However, the incentive as a form of performance-based pay has various disadvantages. Sometimes, incentives can become demotivating especially in cases where the organization is not able to reward their employees within the specified time. There are chances that some of the employees who strive to work hard to achieve their goals may not be able to achieve their goal as a result of market-related factors ending up working less hard.
Then again, incentives can make a feeling of disparity. A few associations in most cases make a financial based incentive plan that encourages them to remunerate their best workers. The individuals who do not get or get less than their colleagues may disregard their performance factor and build up a feeling of inequality. The employers spent a lot of time to structure a fair incentive plan. Any good thing accompanies a cost and therefore the organization that is intending to execute such an arrangement needs to invest a considerable measure of energy and manage things accordingly to build up an incentive scheme that is valuable from all angles. Incentives may be less viable in uncommon circumstances where the representative is doing office work at home till late hours. This turns out to be difficult for the organization to track the work record of the employee in these circumstances. The businesses are expected to watch the execution of their employees and offer them with objectives that are unbiasedly and promptly estimated.
Earning at risk incentives are formed to improve the performance by creating base wage dissatisfaction that triggers a lot of effort directed toward performance behaviours rewarded on incentive pay. With regard to the employees, the earning at risk incentives motivates the employees to work hard regardless of the situation. However, earning at risk incentives creates resentment among employees who do their best and do not qualify for incentives. When the reward becomes a disincentive, the employees can no longer compete, give up and their performance suffers.
From the employers’ perspectives, there are many advantages and disadvantages that come with the various forms of performance-based pay. Regarding merit pay, the employees are able to compete leading to higher productivity in the organization. On the other hand, the employer is able to evaluate the higher and low performing employees and can use it to determine the performance of the organization as a whole. Evidently, merit pay can be used by employers to retain hardworking employees. On the other hand, merit pay has various disadvantages for the employers. To start with, employers find it hard to separate the performance of different workers to figure out who deserves the merit pay. The most alluring commitments and achievements of workers are not quantifiable and the employers feeling remains constant. Also, the measure of time and vitality that the associations put resources into an endeavour to make the execution quantifiable for merit pay can be better spent on conveying administrations to the clients.
Additionally, recognition is another form of performance-based pay that should be considered by employers. Recognizing the employers in an organization motivates works and consequently increasing productivity, creativity and innovation ( Noe et al., 2016 ). However, if recognition is not conducted in the right way it can lead to biasness and some form of entitlement and therefore the employer should put this into consideration to ensure that there is no discord among his employees. An incentive as a form of performance-based pay is an easy and straightforward way to pay employees.
When the employer offers an incentive to his or her employees, he or she boosts their morale thereby encouraging them to contribute immensely to the growth of his or her organization. Besides, incentives improve the work atmosphere as a result of the employer noticing his or her employees work bringing coordination between the employer and employee. However, the employer should be cautious with incentives in the organization since they can create inequality among employees leading to underperformance in the organization. The establishment of an incentive structure wastes a lot of time and money which can be channelled to other departments for improvement.
Earning at risk incentives are formed to improve the performance by creating base wage dissatisfaction that triggers a lot of effort directed toward performance behaviours rewarded on incentive pay. With regard to the employers, the earning at risk incentives should be encouraged to enable the employees to work hard regardless of the situation. However, the only disadvantages of earning at risk incentives to the employer are that it can create resentment among employees who do their best and do not qualify for incentives. This reduces competition in an organization hence the lower performance of workers and eventually low production. When the reward becomes a disincentive, the employees can no longer compete, give up and their performance suffers.
There are many challenges that can be associated with team incentives. In most cases, the team incentives are intended to foster a collaborative environment where each team members aim in helping one another. According to Hamilton et al. (2013), the challenges arise when team members perform at different levels making others feel working harder than others. This eventually led to resentment, infighting and even creating a hostile environment for others. The low performing employees may feel pressured by both their colleagues and the boss to perform at levels beyond their comfort zone. The higher performers may feel doing all the work for the same amount of reward as their less-motivated colleagues.
The other challenge associated with team incentives is that the company or organization finds it very hard to evaluate the performance evaluation process. Besides, if individuals do not understand their role in the group, they are likely to create tension and infighting in the team. For effective performance from each individual, a hybrid approach should be developed to incentive plans. This will help ensure that the top performers give their all resulting in high level of performance in the group while rewarding individual work. This will encourage friendly competition and increase productivity and motivation without creating resentment.
Performance-based pay will not cause employees to behave unethically compared to paying straight salary, wage or salary. This is because performance-based pay enables employees to be paid based on their performance. This will encourage employees to improve their performance since they are driven by compensation and the end benefit of their performance. They have the ability to control their destiny and are motivated to work as much as they wish to be compensated more ( Lavy, 2011 ). Performance-based pay minimizes the need for employee supervision as each individual will be working hard to meet his or her objectives and goals.
Additionally, the performance-based may increase the organizational identification, increased cooperation and higher productivity of workers. Likewise, performance-based pay should be encouraged to enhance higher production in various organizations.
Conclusively, the use of performance-based pay continues to grow in the traditional and new areas of application such as schools, healthcare as well as a government institution. Incentives, merit pay, recognition and earning at risk incentives should be provided in several organizations so that employees and employers can cumulatively promote performance-based pay. The foundation of performance-based pay has several importance on an organization. Firstly, they improve the employees’ performance by tying their performance to the individual, divisional or group. Secondly, performance-based pay improves employees’ retention. Those employees that are not able to achieve the set goals are encouraged to leave while those that are qualified and motivated to deliver are retained to offer the service. Besides, performance-based pay makes administration easy and it is easily understood. The performance policy is cut and dry implying that either the employee performs clearly to the set standards that were stated from the beginning. When the challenges of performance-based pay are addressed successfully, the performance-based pay will be the most effective form of pay.
References
Baron, J. N. (2014). "Commentary on "Promise and Peril in Implementing Pay-forPerformance"." Human Resource Management 43(1).
Hamilton, B. H., Nickerson, J. A., & Owan, H. (2013). Team incentives and worker heterogeneity: An empirical analysis of the impact of teams on productivity and participation. Journal of political Economy , 111 (3), 465-497.
Lavy, V. (2011). Using performance-based pay to improve the quality of teachers. The future of children , 87-109.
Milkovich, G., Newman, J., & Gerhart, B. (2017). Compensation (12th ed.) New York: McGraw-Hill. ISBN 978-1-259-53272-6.
Noe, R. A., Hollenbeck, J. R., Gerhart, B., & Wright, P. M. (2016). Human resource management . China People's University Press.
