Evaluation of payment systems in improving performance

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Payment systems are playing increasingly important roles in contemporary reward practices among a wide range of organizations. If carried out properly, it can motivate people by functioning as a key component of the total reward process (Armstrong and Baron, 2005). In this essay, I will show the definition of payment systems and how payment systems, especially performance-related pay, improve motivation and performance using the case of NCHADS. Then, advantages and weakness aspects of performance-related payment system in improving motivation and performance will be analysed and evaluated.

2. Payment systems Analysis

Pay is generally contingent, which can be determined by various approaches such as performance related pay, competence related pay and contribution related pay. The UK trend is towards pay for performance which directly links pay to performance in the contract of employment(Gilmore and Williams, 2009).

Pilbeam (2009) holds that performance-related pay (PRP) describes pay systems where the pay received by the employee is varied according to the work output achieved. As is known that PRP is an approach of variable pay, employees can get more pay for more output in general and the variable metric is usually determined according to the measurement of performance output Performance judgments and arrangement of pay are principally determined by managers, in other words, performance pay is variable because workers obtain variable pay according to managers' judgment of performance or contribution. Thus, although fairness is a feature in employers' decision to deploy variable pay, it is used primarily to abstract great effort from employees and to increase employees' motivation and commitment to organizational goals (Kersley et al.2006; p.189).

2.1 PRP establishment

Like other payment approaches, performance-related pay system has its own intrinsic advantages and weakness. If only it can be applied appropriately in different specific organization with proper strategy and implement, it will be effective and beneficial for companies.

PRP consists of three essential stages. First, a performance criteria needs to be established especially for jobs with less tangible outputs. For example, the amount of production during a certain period is easy to measure while the output of a manager of human resource department during a working day is very difficult to be tangible. Numerous organizations are facing this kind of difficulty and they need to address this measurement challenge with proper criteria. There are mainly four measures which is often used separately or combined in many organizations: performance indicators, acquisition or utilization of competencies, achievement of job objectives and appraisal rating (Gilmore and Williams, 2009). The second stage is that there needs to be a system of assessing employees' performance against criteria. This assessment is always implemented by the employees' manager. However, managers always cannot make an objective judgment and weighing without any mistakes. So, it is the third stage designed to address this challenge that a regulatory system of PRP allocation is subject not only to parameters but also to scrutiny by the manager's manager or an HR specialist (Gilmore and Williams, 2009).Annex 1 shows how, once an employee performance has been measured, a variable payment amount can be allocated.

2.2 Performance-related payment systems

Performance-related pay is mainly composed by two sectors: one is called Merit-based systems and the other is Goal-based systems.

2.2.1 Metric-based systems

Merit-based systems show the direct manager embarks on an evaluation of each subordinate's work performance during the previous year (Torrington et al, 2002). Basically speaking, not all people in an organization are the same. The fact is always that some have better skills than others. However, many organizations accept respect based on age than respect earned and based on merits, so they may be forced to believe that everyone makes the same contribution to the organization. This perspective will lead to low efficiency of productivity and other severe effects especially in the competitive and crucial business times.

Merit-based systems applied to managing organizations are used to identify differences among employees with different contribution. It focuses on different extent individuals or groups take in the organization's achievement. More pay and rewards will be prized to the part which plays a more important role for a specific success. In general, it is effective to encourage employees to motivate themselves to improve their skill and work. Besides that, focusing on quality of work but not on the quantity can make a great impact on firms' profitability than any negligible impact on some count such as hours.

As Bunsow (2009) suggests that a company's goal is to attract and keep the best people, to compensate them for what they are worth and to justify their cost to customers because customers are willing to pay for high quality products or services. In addition, an important point is how to implement such a system effectively. Thus, an organization should consider various factors which would affect the systems' efficiency. Thereinto, one crucial thing is to establish evaluation criteria. Recently, the Association of Corporate Counsel began working on a "Value Challenge Index" which can be appropriately applied to merit-based evaluation systems. Specifically, the criteria mainly include seven elements: 1. Understands goals and expectation; 2. relevant skills; 3. Efficiency/ process management; 4. responsiveness; 5. Innovation/ Flexibility; 6. Results delivered; 7. Values: diversity/ green/ professionalism. (Rick Rawls, 2009)

Specific and clear criteria can help both in managers' objective evaluation and employees' improvement on performance.

2.2.2 Goal-based systems

Torrington (2002) states that goal-based systems for PRP involve supervisor and subordinate hold meetings at the beginning of the appraisal period and make an agreement between them on a list of objectives. Then, the assessed persons will extract great effort to achieve the goals during the coming months.

Appropriate Goal-based approaches applied to organizations can change performance as well. A significant advantage of this approach is that Goal-based systems are more objective compared with Metric-based Systems. One reason is that there are specific goals made by both managers and employees. In other words, agreements are made between them, so performance evaluations will be made mainly based on the goal-setting not only judged by managers. Another positive impact on performance appraisal is that employees believe that if only they can achieve their own goals, they will obtain rewards and more perfect their work will be done, more benefits they will obtain. It will make a great improvement on individuals' motivation to achieve a specific goal and the enhanced positivity and motivation will encourage themselves work hard and efficient. The key is how to make goal setting efficient. There is nothing as dispiriting as failing to achieve a personal goal for reasons beyond your control, so a goal based on outcomes often make it beyond your control. If staff in a business can set their goals based on personal performance targets or skills to be acquired, then it is easier for them to control over the achievement of their objectives and bring higher satisfaction for themselves (Dorcas and Reinhold, 1987). Another important thing is to make goals measurable, because if a person reaches all conditions of an achievable target, then he can be confident and comfortable to success and if he consistently fails to beat a measurable target, then he can make some adjustment on the object or analyse the reason for failure and take effective action to improve skills. (GetInsideHealth, 2009)

3. Case Study of Performance Related Pay

3.1 Performance systems in NCHADS

The National Centre for HIV/AIDS Dermatology and STDs (NCHADS) was established in 1998 after the megamerger of the National Aids Programmer (NAP) and the National STD and Dermatology Clinic. It is the core institution in the field of Health Industry mainly due to its responsibility for introducing and enforcing policies and strategies for the health sector response to HIV and AIDS as well as STDs. It makes health sector policy action for HIV/AIDS and STDs, arranging administration, state development, cooperation with other health sectors, directing development for HIV/AIDS components, national health sector plan assessment and spread of epidemiology, behaviour and effective STD/HIV/AIDS prevention and treatment materials.(the National Center for HIV/AIDS, 2009)

In December 2001, NCHADS staff was supplied with performance-related pay. At the beginning of 2002, the proposal has been based on an effective task analysis process which lasted until 2005 and revised in August 2007(Functional Task Analysis, 2007). This has led to the ever improving definition of the roles and responsibilities of staff to a systematic approach to structural revisions within the Centre. In turn these advances have played a major part in improving the overall management performance within NCHADS. Specifically, the PRP system is designed to motivate staff so as to drive the national response to HIV/AIDS and stimulate wider improvements in management practice and performance.

3.11 Tasks

A set of tasks is identified for all units, based upon the Functional Task Analysis (FTA), against which the units' performance is assessed. These Tasks are selected to identify the essential, measurable and transparent functions each unit must perform in operational terms and are drawn from the prior experience of the ADB/JEPR REG-9006 Project. They reflect the overall task responsibility of the unit, drawn from the Units' Terms of Reference and general responsibilities assigned to it (Functional Task Analysis, 2007). Annex 1 gives detailed table of Tasks and Verifiable Indicators.

3.12 Verifiable Indicators

A series of measurable indexes is identified which points out levels of performance for each specific task. The indicators are then scored on the following basis: 'High' performance scores 3 points, 'Satisfactory' performance scores 2 points, 'Low' performance scores 1 point and 'Inadequate' performance scores 0 point. Each indicator is scored and the total points awarded are divided by the number of indicators used to arrive at an average score (Functional Task Analysis, 2007). Annex 1 gives detailed table of Performance Tasks and Verifiable Indicators.

3.13 Rates

A 'Schedule of Indicative Based Rates' for PRP within NCHADS is approved every year. NCHADS is working to achieve consistency and comparability between rates as possible as it can. Approved rates for successive years are published and available separately for the information of all staff.

Rates paid against performance scores are:

Scoring Scales

Performance Ranking

Percentage of rate paid

2.5 to 3.0 points



2.0 to 2.5 points



1.5 to 2.0 points



Less than 1.5 points



3.2 Performance Assessment for Senior Management

The Director, Deputy Director(s), and the Heads of Bureau, make a Performance Assessment of the overall management of NCHADS every half year against the following performance tasks/indicators and will set out their conclusion in a report.

·Progress on the NCHADS Comprehensive Annual Work Plan

·Regular monthly Technical Meetings held and minuted

·Regular Coordination Meetings with partners held and minuted.

·Strategic or other significant initiatives taken in the six months under review

·Overall managerial and administrative effectiveness of NCHADS

·Overall Financial management effectiveness, to include any Audits Reports

No absolute quantitative measures are suggested for these; however, to the extent possible, Senior Management will specify the level of performance achieved against these indicators in their twice yearly Senior Management Performance Assessment Report. (National Centre for HIV/AIDS, Dermatology and STD, 2007)

Performance payments for top managers will depend on the overall accomplishment of the organization which is taken on in the double year Senior Management Performance Assessment Report. (SMPAR)

The two sectors processed of the reports above will be collected by the Secretary of State with responsibility for the overview of NCHADS at the end of both January and July annually with details of the top managers' payments checked during the same period according to the four scoring scales levels listed in paragraph 3.13 above. The Secretary of State will investigate essential documents, evaluating the proposal, informing the board of his decision. In addition, the Secretary could ask for extra documents to improve his consideration.

The Director of the company could remonstrate on behalf of top managers if they argue the approved level of pay statements. The Secretary of State will pay attention on any remonstrates and receive suggestions from others when he considers reasonable ahead of making a final decision.

3.3 Discussion

Performance-related payment is adopted as a core payment strategy in the institution of the case above. It is evident that tangible assessment criteria were created in the system and most of the specific performance tasks were verifiable and measurable. For example, in order to evaluate staff's performance, it is set out that the percentage of timely conduct of activities as specified in approved work plan was to be verified regularly. In order to assess senior managers, various specific performance tasks were set out. For instant, top managers will be verified on the regular technical and coordination meetings.

These tangible indicators are the effective measures to help all the staff improve their performance. At the same time, a direct combination between performance and payment can also stimulate staff's motivation, which makes a significant positive impact on the whole institution's development.

However, there were also some weaknesses in the payment system of the case. First, the indicators are not comprehensive enough yet. For example, In terms of decision made by directors, if any divisiveness is created, there was no specific and clear measures could be taken to address it. Maybe, the final decision would be made still mainly by director's judgment which would lead the decision less objective and tangible. Secondly, as to payment issues, it is a problem that what amount of pay constitutes a significant increase in the eyes of staff. In realistic activities, most of companies will meet this kind of problems. If the organizations cannot address it appropriately, it is easy to lead to staff's unsatisfaction and low morale which may cause a negative impact on the entirety.

4. Evaluation

Pilbeam and Corbridge (2006) paid attention to PRP conflicts and ambiguirity. These are related to the effect PRP makes on employee motivation, as well as to the intrinsic difficulties of assessing individual and collective performances. Although PRP has potential in motivation to some extent, many workers and employees treat money as just a temporary satisfaction. Pilbeam (2009) hold that employees often have low expectations about the motivational abilities of pay because PRP may actually demotivate average performers receiving small PRP amounts.

There are also numerous challenges in establishing performance criteria tangibly and

effectively. Whilst it is possible to do this where there is transparent and clear performance evaluation available, it is hard to bring this approach into work which has less tangible and quantifiable outputs (Pilbeam, 2009). This situation may directly lead PRP systems lose its efficiency and positivity in improving motivation and performance.

In addition, there may be also some possibly unfair discrimination issues to happen. The Equal Opportunities Commission (EOC 2003) suggests that discrimination may be occurring and recommends the monitoring of performance-related payments by gender.

Although PRP internally has significant disadvantages, it is useful to improve motivation and performance. Meantime, there are some organizational conditions that may be necessary for PRP to be more effective. Establishing high levels of trust between appraising managers and employees is critical. Besides that, differences in individual job performance should be measured based on the principle of validity and reliability. (Pilbeam, 2009) If PRP can be improved in these aspects, its efficiency in improving motivation and performance will be obviously and significantly enhanced.