Pay for Performance

Performance Related Pay provides individuals with financial rewards in the form of increase to basis pay or cash bonuses which are linked to an assessment of performance, usually in relation to agreed objectives. PRP emerged in the entrepreneurial 1980s as the answer to motivating people & developing performance-oriented cultures. It was seen as a major lever for change, &the government of the day adopted it with much enthusiasm but little understanding as a means of transforming public sector bodies into businesses. Performance related pay is method of paying staff based on how they perform. Bet ter performance results in higher levels of pay for the individual, poor performance may result in no change to pay or a decrease. There are a number of reasons why employer might introduce this type of pay scheme. They may: be keen to keep current staff want to compete for new talent be seeking a fairer way of distributing wages In order for performance-related schemes to work they should be based on clear, measurable targets agreed by both employer and employee. It normally find out about these targets from the contract of employment and performance appraisal meetings they has with their manager. Performance related pay falls broadly under two headings: 1. Merit based The person being appraised will then be scored on their achievement over the year and this will correspond to a level of pay that they will be awarded. Unfortunately this system is not very efficient as the focus can be on recent achievement, not on the entire year. For example if an employee works exceptionally hard and to a high standard for the first two thirds of a year, yet suffers an event in their personal life that causes their work level to diminish the appraiser may focus more on the recent performance as opposed to the hard work that was performed earlier in the year 2. Goal based The employee is then scored by whether they achieved this objective, and this score is then linked to a pay level. A possible downside to this approach is that the employee may focus solely on what he/she believes will allow them to achieve this goal, thus neglecting other areas of their work. One major benefit of goal-based of this method is that any organizational aims/goals will become the priority of the individual. This allows companies to communicate their strategy in a way that makes it clearer what an individual has to do to adhere to it.

There are two primary flaws in most pay for performance systems: 1) They overweight transactions (short-term benefits) as opposed to relationships (long-term benefits). 2) Significant individual performance in a failing company is under-rewarded and insignificant individual performance in a highly successful company is over-rewarded. How do you select a PFP system? In designing a PFP system three major questions should be asked. 1. Who should be included in PFP system? 2. How will performance be measured? 3. Which incentives will be used?

Summary The PFP system must support the competitive strategy and values of the organization. It the strategy emphasizes entrepreneurial activity and independent effort, individual PFP system become increasingly important and effective. Incentive systems must be compatible with organizational values. Openness and trust are necessary if employees are to accept the standards and believe in the equity of the rewards. The bottom line remains that for any PFP system to work, rewards valued by the worker must be clearly linked to outcomes valued by internal and, most important, external customers. Virtually all the research on high performance work systems supports the view that proper PFP systems can help to create and sustain a competitive advantage when the focus is on organizations that follow academic guidelines for development and maintenance, PFP systems look a winner.