Abstract
This paper examined the issues associated with pay for performance. To measure the effectiveness of pay for performance plans, a two stage process is used. In the first stage, the strength of each plan relative to performance is estimated. In the second stage, the link between payment for performance metric and subsequent job performance rankings for the employees is examined.In terms of the disadvantages associated with pay for performance from an employee`s perspective, various factors were identified. These include conflict over goals, lack of openness, lack of reliability, fairness and longevity, and employees who are not rewarded feel demotivated. These factors discourage workers from embracing pay for performance plans. From the employers` perspective, the disadvantages include workers neglecting unrewarded tasks, cost implications, reduce cooperation and increased competition and discourage intrinsic motivatio
Pay-For-Performance
Under pay for performance plans, workers are rewarded based on their productivity. Many corporations and organizations fully or partially tie workers` wages to their performance. Payments vary with some measure of performance of an individual, a team, or the organization as a whole. The main purposes of pay-for-performance plans include attaining the organization`s strategic goals, reinforcing the organization`s norms, motivating performance at the organizational, group and individual levels and recognizing different worker contributions. This paper examines the issue of pay for performance. Specifically, the paper examines how companies can measure the effectiveness of their pay-for-performance plans, the disadvantages of using a pay-for-performance plan from an employee`s perspective and the disadvantages of using a pay-for-performance plan from an employer`s perspective.
Measuring the Effectiveness of Pay-For-Performance Plans
Pay for performance plans come at a cost to any organization. As a result, it is important to measure the effectiveness of the plans to understand whether they create positive impacts on employee motivation and the degree to which they influence important employment outcomes. Firstly, it is important to understand that pay for performance can take several forms that include individual annual bonuses, merit pay, and long-term incentives. To measure the effectiveness of these plans, organizations should use a two stage process (Kahn & Sherer, 1990). In the first stage, the strength of each plan relative to performance is estimated. For example, a metric is computed to capture how strongly the organization`s performance in 2013 was linked to the rewards given in the same year. In the second stage, the link between payment for performance metric and subsequent job performance rankings for the employees is examined. For instance, an organization can examine the relationship between 2013 pay for performance metric and job performance rankings in 2014.
In implementing these two processes, an organization begins by approximating what determined its bonuses, merit pay, and long-term incentives. The organization considers the impacts of various factors including gender, tenure, worker performance, and salary on 2013 financial rewards to ascertain how strong job performance is linked to the three types of performance for pay. The existing organizational policy should provide guidance in terms of the link between performance and pay. However, it is worth noting that in some cases, managers have the discretion in terms of allocating rewards. At the end of this stage, an organization is able to determine the extent to which rewards are linked to performance and use the information to develop a metric of how strongly rewards are linked to performance for each worker.
Basing on the results obtained in the first stage, the organization now has three metrics (bonuses, long-term incentives and merit pay) for each employee, which represents the strength of the link between pay and performance. This is then followed by testing whether the pay for performance reward system motivates the workers to achieve higher performance. In this regard, the 2014 job performance ratings are analyzed based on the 2013 performance. Additional analysis is conducted to ascertain the exact impact associated with the three metrics- bonuses, long-term incentives and merit pay-and whether they are different from each other. The organization can then conclude on the degree to which the pay for performance plans are effective and determine which plans are more effective in motivating performance.
Disadvantages of using a Pay-For-Performance Plan: Employee’s Perspective
Conflict over Goals
Under pay for performance, employees may disagree over goals. For instance, in Cincinnati, a newly created pay for performance scheme for teachers that was supported by the majority of teachers in the district was strongly opposed by teachers at Montessori schools in the same district (Pilcher, 2000). This is because the Montessori teachers had different education philosophy and teaching methods compared to those used in mainstream schools. As a result, they were concerned that they may be judged based on goals that they did not necessarily share. Johnson (2000) notes that in the absence of a clear of accord on what organizations and workers are aiming to do, pay for performance plans that reward particular outcomes above others are unsuitable and are more likely to be opposed by employees who feel shortchanged. For example, if schools fail to clearly define their goals, and if schools pursue too many goals at the same time, the expectations on how teachers perform will be ambiguous and conflicting. No evaluation tool, however excellently designed can address these issues (Johnson, 2000). The consistency and quality of children that teachers teach are not within their control. Teachers are expected to perform with what they are given, and they are not allowed to discard. Under such circumstances, pay for performance may be met with resistance from the employees.
Absence of Openness
Under pay for performance, the workers expectthat they will be given convincing reasons as to why some workers earn more than others, and they require clear guidance on how they too can earn more (Pouliakas, 2010). However, in some professions such as teaching, clear-cut evaluations are difficult to achieve. As a result, workers may be unwilling to discuss their problems with their line managers or supervisors because they fear that once their manager (coach) changes to a referee (the appraiser) they may use their problems against them. In addition, professions such as teaching are imprecise in nature. As a result, supervisors are unable to offer clear answers toteachers who seek to know what they could do to improve their merit-based earnings. In the absence of clear-cut answers to such questions, employees may have less incentive to change their behavior to pursue higher earnings, which may make them reluctant to support performance based pay.
Lack of Reliability, Fairness and Longevity
Workers may be less willing to accept a pay for performance scheme if they believe that the scheme lacks reliability, fairness and longevity. In a study by Marsden (2000), 82% of the study participants were of the view that many excellent employees can never pass the evaluation threshold because quotas are placed on the available places. This is largely due to funding problems, especially in the public sector where budgets are determined by politicians. Although pay for performance schemes in the public sector may be fully funded, at some stage, funding may be unavailable to finance the scheme completely or fairly. The problem is made worse when it comes to evaluation. Some jobs are too complex to evaluate. As a result, if not done well, it results in resentment and may lead to demotivation and dissatisfaction among the workers.
Workers who are not rewarded feel demoralized
The theory underpinning pay for performance is that those who are not rewarded get the message that their performance level is below standard and they either improve or exit. Whether they improve or exit, the employer benefits. In practice however, even workers who achieve satisfactory performance can get discouraged by pay for performance schemes that do not benefit them. As already noted, some pay for performance schemes attempt to contain costs through quotas such that only a certain proportion of employees can get merit awards or bonuses. This is supported by the OECD (2005) report which indicates that the UK introduced a pay for performance scheme in 1987. However, a 25% quota was set and later increased to 35%. As a result, 65% of the civil servants majority of who were ranked as “fully satisfactory” got no benefits for their efforts, this lead to large scale dissatisfaction with the scheme that eventually led to its abandonment. Therefore, pay for performance can create winners and losers within an organization and the losers tend to suffer loss of self-esteem and they become demotivated.
Disadvantages of Using a Pay-For-Performance Plan: Employers’ Perspective
Abandonment of unrewarded tasks
By rewarding particular aspects of a job, pay for performance communicates what is considered important and what type of behavior is desirable. Whereas this is the objective of such a plan, it can be counterproductive because the workers become so rigidly fixed on attaining their measurable targets and ignore other important aspects of their jobs. Heery(1996) studied employees of Local Authority; his finding indicated that 14% of study participants acknowledged that they only concentrated on the aspects of their jobs that were measurable. An additional 10%admitted that they only concentrated on those tasks that were included in their appraisal. The same argument is supported by Pouliakas (2010)who note that pay for performance encourages opportunistic behavior among some workers. They argue that teachers who are paid based on performance may focus so much on raising the students` test scores but ignore the broader curriculum goals or the students` emotional needs. Because of this employers may not prefer pay for performance as it may impede the achievement of the broader organization goals.
Cost Implications
It is often assumed that pay for performance saves cost because the payments are not spread to many employees. However, such plans are significantly costly. Other than the actual money that the employees receive, there are extra costs associated with administration, which include costs associated with appraising, monitoring and managing performance. According to Hanushek(2007), to employers, a uniform salary schedule tends to reduce the unpredictability and uncertainty associated with future salary expenses. With regard to administrative costs, the simple nature of a uniform salary schedule makes it less costly to implement. Compared to pay for performance plans, a small number of administrative workers are required in maintaining the system. For example, in the teaching profession increased adoption of pay for performance may require districts to employ extra administrators leading to significant restructuring of roles within the organization. This makes it less appealing to employers. In a study byMozenter &Stickell (2009), 17% of school districts in the U.S. that had adopted but later dropped the use of performance based pay attributed the failure to financial difficulties. In many organizations, funds are limited as a result; even those who qualify for the bonuses may not receive the full amounts, which makes pay for performance less appealing to employers, especially when they face financial constraints.
Creates competition and limits co-operation
Pay for performance can create competition and discourage cooperation among employees. In a study of Inland Revenue employees by Marsden&Richardson (1994), 26% of the participants reported that pay for performance made them less willing to help their coworkers. A follow up study by Marsden &French (1998) indicated that despite conscious efforts by management to deal with the negative impacts of the scheme, the percentage of workers not willing to help their co-workers had increased to 63%. The majority of the participants noted that pay for performance discourages teamwork. An addition 86% of respondents noted that the scheme had created jealousies among the workforce. Employers are interested in seeing cooperation in the workplace, not just between employees at the same level, but also between workers and their manager. However, this is often not the case with pay for performance. In a study by Heery (1996)6% Local Authority workers noted that pay for performance had reduced the trust between managers and subordinates. Similarly, Marsden & French (1998) in their study of NHS employees found that 19% of respondents acknowledged that they were less willing to cooperate with their managers. When managers were asked, they noted that 30% of their subordinates were no longer willing to cooperate with management after the introduction of pay for performance. Many employers and workers, particularly in the public sector see individual pay for performance as a cause of heightened tensions in the workplace. It also creates jealousies among workers and unfairness. This makes managers lose respect from their subordinates and reduces team work within the organization.
Extrinsic motivation
Some employers are strongly opposed to using money to motivate employees because it is an extrinsic source of motivation that has limited long-term value to the organization. Instead, employers prefer to leverage on the workers` intrinsic motivation and have workers who are interested in doing a good job, producing quality products and are proud of their work. Rather than reward employees for performance, employers prefer to give their workers an opportunity to have input in their work, respect the workers, and allow them to do a good job. For pay for performance to attain the objective of contributing to the success of the organization, right things have to be measured and rewarded. However, pay for performance can negatively affect employee`s motivation if it rewards the wrong things. In turn, this damages the employees` long-term motivation, strains relationships and stops them from taking risks. In this regard, some employers consider rewards for certain behaviors to be bribes. Workers worth retaining do not believe in pay for performance, particularly when it is viewed as the only motivating factor.
In conclusion, pay for performance schemes is a significant investment for any organization. However, unless properly designed and implemented, it can face opposition from employees and in some cases, employers may fail to see its value to the organization. For pay for a performance scheme to be effective, it must promote the right behaviors while encouraging productivity and cooperation.
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