To link performance with pay scales is something which any employer desires to attain. Job positions with performance related pay (PRP) draws employees who possess high capability and inspire them to give their best efforts and contribution. In the past few years, there is an increasing trend specifically in private firms towards linking rewards with performance of employees for the accomplishment of objectives. It has been increased because rewards system motivates employees which lead to improve the performance of employees. It affect things because enhancement in employee’s performance lead to improve the productivity in business. Therefore, pay scales are linked with performance. In several developed nations, there has been a rising interest in PRP, which is promoted by the government. For critically evaluating the extent to which individual performance related pay can stimulate high level of performance of employees, it has been assessed that performance related pay increases morale and improves performance which in turn leads to increased operational outcomes. However, it should be taken into account that this scheme can be taken in use as a method for employing goal setting policy in an organisation. It can be said that bringing performance linked pay-scales is valid for the execution of goal setting in public organisations. This can be said as an essential benefit of applying performance linked pay. Moreover, application of PRP gives an opportunity to redefine the set norms of organisational performance. This affects organisation because changes need to be made in firm’s norms which is not easy as it consumes time as employees need some duration for adoptin
However, it is also argued that employees may also get discouraged if the targets, which are set, are tough to attain. Performance related pay is place by some companies who want to reward employees on an individual or team basis. Process of performance related pay is dependent on the quality of judgement made by management. Nevertheless, another Hopp and Zenk (2012) argue that it is an effective method for handling bad performance and productivity. Apart from that, it is helpful to retain employees in the organisation. Still, counter statement becomes a weak point from the perspective of employees. One may argue that performance related pay could reduce the engagement of trade unions as the emphasis shifts from collectivism to individualism. It affects union and it is important for them to redefine their own roles as collective representative. On the other side, introduction of performance-linked pay is favoured as a necessity to the modern business scenario. It is defended with the fact that management takes use of this scheme to set its goals and objectives. It makes improvement in productivity and performance of staff. One may argue that introducing performance related compensation in any enterprise is implemented for encouraging fairness and equivalence along with the rewards. However, criticism of performance-linked pay-scales suggests that it makes reduction in pay equity and can make the firm responsible for expensive equivalent pay challenges if it does not operate in a fair manner. Also, the performance appraisal procedure can be influenced due to emphasis on financial rewards instead of developmental requirements of staff.
On the flip side of this evaluation, it is considered that the lower level employees in an organisation may like this kind of scheme and take it as an opportunity for their growth in roles and development of their careers. It also gives incentives in a direct manner to the staff for attaining stated goals and objectives, their contribution and efforts are given with a recognition with a concrete reward. Yet, it can be argued that performance related pay is an obstacle in fostering team spirit and collaboration in an organisation. It is narrowly focused as rewards are made with a short-term quantitative objective. On the other hand, it is asserted that a cordial and smooth performance oriented culture in an organisation can be developed if it is introduced. It is supportive for the culture, current values and innovation in organisation. It is also analysed that performance linked incentive supports and facilitates in the implementation of general strategies in an organisation due to clear-cut structure of goals and objectives. In addition, it attracts knowledgeable and talented employees who have expectations that their abilities, talent and qualifications will be appropriately rewarded.
However, this means that the counter argument in this evaluation becomes a weakness that there is a threat that workers can build expectation of an additive pay-out every year. When there is situation of low inflation in a country, then this scheme may not prove to be beneficial. The focus and dedication of employees increase with performance linked pay. If an organisation adopts an effective individual performance related pay system then it increases the possibilities of highly motivated staff as they see that there is a close relationship between their performance and the amount they are paid with. This in turn gets beneficiary for the organisation because it decreases the rate of staff turnover. On the contrary, it is asserted that pay for performance scheme is too much subjective because it leads to inconsistent assessment of performance of staff and then it is ineffective which creates discontentment in the employees. Workers who perform well, will start performing poorly when they get their increased bonus or salary which leads to inconsistent performance which is one of the significant weak point of this scheme.
This is further supported with an argument that monetary benefits are the major drivers, which can increase productivity and performance of workers. If employees are provided with rewards for their best performance, it will motivate other employees to improve their performance in order to get the same. In addition to this, standard based ways provides a standardisation level in evaluating employees which may reduce fear of favouritism in staff and makes the expectation of employer very clear. Apart from that, employees will feel secured as they know that their performance will be assessed objectively as per the work standards rather than on the basis of desires of their superiors. It is also beneficial on the part of employees as it may increase their level of job satisfaction. They enjoy their tasks and activities in an environment where their performance and productivity is rewarded in a fair appropriate. This increases positivity in their behaviour and attitude.
Still, there are some reasons that may negatively put their impact on the job satisfaction of employees if pay for performance is introduced in a firm. The major reason behind it is improper selection or realisation of this scheme. If the staff is dissatisfied with the unfair distribution of bonuses or any other aspect, it is not possible for employees to be happy and contended. The fact associated with this scheme is that it can be applied only as a disciplinary measure, which in practical life can lead to increased work contribution and less satisfaction which has a negative impact on workers.
Circumstances in which PRP works best and in which it does not work well
The situation in which performance related pay will prove to be effective are elaborated here:
High attrition rate
Attrition is a situation in an organisation when there is a gradual loss of workers. In simple terms, comparatively high rate of attrition is very problematic for firms. This may be due to several reasons such as poor or partial treatment, unfavourable working conditions or low pay scales and many more. This can be due to retirement or elimination of an employee from the organisation. It is major problem in any organisation, which needs to be solved with proper care and attention, otherwise it can harm the bottom line of organisation. In such a circumstance, pay for performance can be a good option for firms to retain their staff when this type of situation arises. This may prove to be a good method for retaining them as it will inspire them to be with the firm which respects and considers their performance and contribution and then pay in accordance to it.
Recruitment and selection
When firm has a situation in which it wants to hire talented and qualified professionals and it is not able to do the same, the performance related pay can prove to be a good way in through which it will be able to recruit skilled and knowledgeable staff which will be beneficial for the firm and its image. When situation of recruitment arises in any enterprise then the firm can attract new employees with promoting this scheme. When people get to know about this scheme in an organisation they naturally develop a feeling that this organisation gives due recognition and respect to performance and efforts. This creates a desire and willingness to join that firm.
However, in some situations this scheme does not work effectively, these situations are mentioned below:
Low inflation rate
If an enterprise operates in a country, which is going through high inflation, then this type of scheme does not works. This scheme needs high amount of resources, efforts and money to make it effective. When inflation rates are very low it is not possible for the employer to pay such heavy amounts. Thus, it may prove ineffective in this kind of situation.
Poor financial condition of organisation
When the firm is suffering from losses then performance related pay cannot be applied; there are ups and downs in the business. It is not necessary that the fiscal condition of an organisation is always good and stable. Therefore, this scheme may not work in this kind of situation.
Different issues in PRP
There are different issues for Performance related pay in different context such as small and large organization, different generation of employees in term of rate, public and private sector etch. Some of these are discussed below:
Performance related pay issues faced by different employees who work in different in small or large organization but different is this that issues are of different kind. Performance related pay is a financial reward for employees who work effectively and efficiently for the organizations. In small organisation, issues such as employee were not payed as they work for achieving success. Along with this, performance related pay could be financial or non-financial. Some of the small business adopted the pay for performance but they are unable to measure the performance due to unavailability of resources for measuring the performance (Hayek, Thomas and Montalvo, 2016). Then they are unable to judge who performs better in the organization. It gives rise to pay by making own decision without measuring its. This affects employees and demotivate them, which lead to impact goal and objective in future. This will put a huge impact on company because employees feel that discrimination is done with them which will make them demotivates to work hard by which company’s productivity will get affected.
On the other hand, in large organizations there are large number of employee who face issues relate to performance related pay due to lack of reward policy. Along with this in the organization at the time of pay related to preform ace discrimination can be done which lead to impact the performance of employees. In any organization that follows the performance related pay then it need to pay it fairly without making any discriminating or cheating. In large-scale industry employee are not treated equally at the time of paying. If employees were not paid fairly then they may switch to other firm or not work hard for the organisation which directly impact company’s productivity.
Monetary reward which is provided to employees is for limited period of time and thus, it should be given after regular intervals to motivate the staff to work effectually. These are some of the reason which lead to pay in performance related fails, and there are some problems and issues which are faced by employer and management from circumstance which are as follows. Firstly, in organization if inadequate criteria for measuring the performance is used, or method used for measuring performance not understand or communicated properly then it impact work of employees. Secondly, inappropriate performance appraisal system such as objective of performance appraisal not meet the objective of the reward system. For example, implementation of performance related pay for promotion purpose help in getting motivated employees. On the other hand normal appraisal system should not be used by management for identifying the performance pay for each employees. Finally, the lack of attention on the regular feedback of performance of employee give rise to ineffective pay for performance. It provide negative impact on employee’s performance due to which employees unable to get effective pay for their performance.
The non-recognition sometime dependent on the outside factor for the control of employees that is exchange rate, recession and management decision. There are two benefits related to pay in first it relates to employment. If there is increase in basic pay then it can transfer to a profit related to pay otherwise employee need to hire other employee on fixes wage cost or in less wage. The performance related pay is the best method which help organization in for accurately measuring the performance of individual. Further it leads to improve in organizational performance (Bryson and et. al., 2013). While if the organisation recruits new employee then it impacts the quantum of old employees. The second benefits is that the increase in earning through the support of performance related pay scheme benefits employee as well as organization. It benefits employees because they can easily fulfil their basic needs on the other hand, it motivates employee which lead to improve company’s productivity and profitability.
Another problem related to performance related pay is that it is not easy to measure the performance of each employees. In different industries, there are different type of problems like reduced sales and revenue due to inefficient services given by de-motivated employees (Park, Min and Chen, 2016). The fact is that it is difficult to measure the performance of employees fairly and it can cause dissatisfaction among workers at workplace and thus, they render poor quality services (Gerhart and Fang, 2014). Apart from this, it can be effective in industries where job performance is easy to measure and when the bonus is major part of salary amounts (Daley, 2012). This is in the case of the financial industry, sales position and recruitment because in this type of job it is easy to understand that pay for performance is part of wages and employees performance must be maintained so that extra wages can be earned. The performance related pay appear much more objective in these industries because it is traditionally accepted (Sriyan de Silva 2016). On the other hand, in some industries performance related pay is not an effective tool because of the all reason that are listed above. As it can be stated that PRP lead to job dissatisfaction for some of the employees because they feel inequality in system.
There are two primary flaws in most pay for performance system that is the overweight transaction is short term benefits as opposed to long-term benefits. It can create unhealthy rivalry between employees (Washk 2016). Secondly, there is a reduction within employee performance due to under rewarded and insignificant performance of individual in successful business. Employee would not perform well if they do not get monetary or non-monetary benefits for their performance. This affect the productivity and profitability of business (Mossialos, Wenzl and Anderson, 2016). This shows that if any organization implements the performance related pay then it needs to use appropriate tool for measuring the performance of employee. Along with this, performance related pay helps in the retention of employees for longer period of time. It works in different situations that are discussed above, which are high attrition rate and recruitment rate. If there is an effective performance related pay structure in place then the organisation is able to attract highly skilled candidates.
From the above discussion, it can be concluded individual performance related pay can stimulate high level of performance of employees. Moreover, it has been assessed that performance related pay increases morale and improves performance which in turn leads to increased operational outcomes. The performance appraisal procedure can be influenced due to emphasis on financial rewards instead of developmental requirements of staff. It is also asserted that pay for performance scheme is too much subjective because it leads to inconsistent assessment of performance of staff and then it is ineffective which creates discontentment in the employees. Employees will feel secured as they know that their performance will be assessed objectively as per the work standards rather than based on desires of their superiors.
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