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Managing individual performance in organisations has focused on estimating performance and distributing reward, with effective performance which is seen as a result of interaction between individual ability and motivation. By and large, it is recognised that planning and enabling performance have a critical effect on individual performance. Managers use several techniques to find out performance and effort of employees. Performance appraisal is process which is taken by managers to review performance and formalize it. Performance management has critical effect on individual performance and in this case also on company goals. In this part of assignment performance appraisal and performance related pay will be described in depth.
Provide market competitive compensation that incorporates both salary and non-salary benefits, such as healthcare, retirement, life insurance, disability insurance, annual and sick leave, and other optional benefits.
To assist in the administration of compensation plans, most organizations utilize some type of formal “pay structure”. A formal pay structure provides the framework and formal structure for assessing jobs and grouping similar jobs together. Factors used in grouping jobs within a pay structure often include:
Level of Suspension
The two most common forms of pay structures are “Grades” and “Bands”. The distance between the minimum and maximum of a pay range is called the “range spread”. Grades typically have very narrow range spreads, while Bands have very broad range spreads. This has led to the commonly used term of “broadband” to describe the range of pay rates within a structure using a band approach. (http://www.hr.vt.edu/compensation/HYPERLINK “http://www.hr.vt.edu/compensation/compmgt/comp_philosophy/index.html”
For those employees who were with Virginia Tech around 1999 – 2000, you may remember when the state switched from pay grades to pay bands. Unlike the old pay grade system where an increase in responsibilities often meant a promotion to the next pay grade, pay bands represent a much broader range of different types of jobs and levels of responsibility. As you can see in the illustration below, in a grade system Job “A” and Job “B” are in different pay grades. However, in pay band system such as we currently have at Virginia Tech, Job “A” and Job “B” are in the same pay band. Please notice however that even though the pay band is the same, there is still a significant difference in the target salary level due to the differences in the level of responsibility and job content of the two jobs. (
The key points here are:
It’s not necessary to be moved from one band to another in order to receive a significant salary increase and
Just because two positions have different levels of responsibility/complexity/etc, does not necessarily mean that they should be different pay brands.
Figure 2. Pay Structure Grades and Bands
Robert Bacal, Performance Management – A Briefcase Book, (1999, p.12) tells Performance appraisal is usually considered to be the process and time when manager and employee sit down to review the employee’s performance over the last year, or month, or even shorter time spans. Most of the time people think of it as a once a year event, which is a recipe for disaster. Traditionally performance appraisal systems have provided a formalised process to review employee performance. This normally requires the manager and employee to take part in a performance review meeting.
Why Should You Appraise Performance
According to Dessler and Walker (1999, p.452) there are several reasons to appraise performance. First, appraisals provide information upon which promotion and salary decisions can be made. Second, they provide an opportunity for you and your subordinate to review the subordinates’ work-related behaviour. This in turn lets both of you develop a plan for correcting any deficiencies the appraisal might unearth, and reinforce the things the subordinate does right. Finally, the appraisal should be central to your company’s career plan because it provides a good opportunity to review employees` career plans in light of their exhibited strengths and weaknesses.
Performance Appraisal System flow
In performance appraisal meetings, several of methods are used to document, or record, or summarize performance discussions, rating scales, critical incident summaries, etc. All these methods are gathered and processed by similar system flow. P.A Handbook (1995, p.8) describes performance appraisal system flow:
Developing Employee Performance Appraisal Plans (EPAP)
Elements Standards (Benchmark Performance Standards)
Documenting Elements and Standards
Feedback during the Performance Year
Rating Critical Elements
Rating of Record
Discussion with Employee
Action Based on Performance
Links to Other Personnel Actions
Dealing with Poor Performance
Figure 1. The Performance Appraisal Cycle (John Shields, 2007, p: 23, Managing employee performance and reward)
As seem above performance appraisals are essential for the effective management and evaluation of staff. Appraisals help develop individuals, improve organizational performance and feed into business planning. Performance appraisals also typically feed into organizational annual pay and grading reviews, which commonly also happen at the same time the business planning for the next trading year. Performance appraisals are also essential for career and succession planning, staff motivation, attitude and behavior development, communicating and aligning individual and organizational aims and encouraging positive relationships between management and staff.
Goals of the Performance Appraisal System
According to Beer, Russell and Ralph (1995, 23)” the process of performance management is one of the most important leadership responsibilities. The performance appraisal system has three primary goals:
Provide a helpful structure, open and honest communication between the employee and his/her supervisor
Improve employee development through performance feedback and through the identification of future professional development activities
Measure and document job performance as a basis for making promotion, compensation and other personnel management decisions”
Dessler (2006, p.336) Managing employee performance is an integral part of the work that all managers and rating officials perform throughout the year. It is as important as managing financial resources and program outcomes because employee performance has an extreme effect on both the financial and program components of any organization.
Beer, Russell and Ralph (1994, p.24) the effectiveness of appraisal systems hinges on a range of different factors. Three most common reasons for failure of an appraisal system are:
Unclear performance criteria
Poor information sharing and connection with the boss
Appraiser missing information on the manager’s real performance
Other problems are a lack of ongoing performance feedback, a lack of focus on management development, the review process lacking structure, etc.
According to Claydon and Beardwell (2007, p.511) The purpose of performance planning, review and appraisal need to be made clear if employees at all levels in the organization are to play an active part in the process. It is possible that some employees and line managers may meet performance appraisal schemes with distrust, suspicion and fear, but an integrated effective process can lead to increased organizational performance and employee motivation. It is important for employees to be genuinely involved in the design of an appraisal scheme, the evaluation of performance, and the objective-setting process. An appraisal scheme should be set up in an atmosphere of openness, with agreement between management, employees and employee representatives on the design of the scheme. Employees need to have a clear understanding of the purpose of the process.
However applying performance appraisal its own is not really worthy. Other performance management systems and performance appraisal systems should put in practice as a whole. Robert Bacal , Performance Management – A Briefcase Book,(1999, p. 34)
Pay for Performance
Coy (2009, p.S7) “in challenging economies it is believed that keeping employees happy is essential for organizations performance. To do this, tying employees` pay to their performance is widely popular. Indeed, with the emphasis on competitiveness, productivity, and the trend for virtually all employers is to tie at least some portion of their employees` pay to employees` and company’s performance”.
In most theoretical models of HRM, pay is essential on the regulation of the employment relationship. Academician, policy makers, and corporate leaders recognize the difficulty of appraising the use of reward systems as a key element in the pursuit of substantive HRM goals of obligation, flexibility and quality.
Pay for performance is a tool which HR professionals can wield in an effort to retain their best. When it is carefully applied, pay for performance systems can systematically link with employee goal achievement, providing very specific incentives for employee behavior that are in line with broader organizational objectives.(Bratton and Gold, 2007, p:238)
Figure 3. A Model of Reward Management (Bratton and Gold, 2001, p:246)
Advantages of PFP
It is not difficult to see why PFP has attracted the interest of managers, consultants and government ministers. Bratton and Gold (2007, p.455) describes “its theoretical attractions are considerable and include the following reasons:
Attracting good performance
Hewlett-Packard (Case study 1) In the early 90s, Hewlett-Packard seemed a perfect setting for innovations in pay. A so-called “built-to-last” company, it was highly decentralized and enjoyed a sense of mutual trust, high commitment, and wide use of management by objectives. The workforce was salaried and the merit system was based on peer comparisons at the salaried level. There were no executive bonuses. Stock options were awarded as recognition. But there was also a lot of pressure in the company, said Beer. Managers of thirteen units took the initiative of appealing to headquarters to try something new to spur on their employees. According to Beer, managers in many companies look to pay-for-performance for good reasons. They expect that it will attract and motivate people. They expect performance standards will outweigh the costs of whatever incentives they put in place. They also want protection against business exigencies: should the market go south, they don’t want to be permanently stuck with new costs. (Lagace, 2003)
Increasing in quality individual performance
McDonald’s (Case study 2) Base pay, rewards pay, and rewards program follows as “Pay For Performance” its the best results and great opportunities pay. Employees’ base pay is the most portion of their compensation. McDonald’s sustain the competitiveness of their base pay through an annual review from both external market data and internal peer data. Moreover, they have a broadbanding compensation system that allows for flexibility in term of pay, movement and growth. In addition, incentive pay provides to their employees with the opportunity to earn compensation when their performance meet and exceed goals. The long term of incentives are granted to eligible employees to both reward and retain key employees who have shown sustained performance and can impact long term value creation at McDonald’s.
BMW (Case study 3) In 2001, the new bonus payment arrangement applied for production employees in the Germany and UK operations. The bonus system applied to all 36,000 production employees who operated with defined performance targets. On top of the basic salary a fixed 25% additional bonus was paid to all employees for meeting prearranged quotas. This quota involved producing a set number of units to the company’s quality standards by a workforce of an agreed size. Employees in each group were consulted and invited to comment on whether the quotas that were realistic and achievable. In addition, employees could also earn extra pay through a personal supplement, that was payable if an individual contributed to the group results. Expectations and specific goals were discussed and agreed in talks between the employee and the supervisor. Thus, an individual’s contribution to the group was discussed every year and this assessment determined the personal supplement received. (Boddy. 1998 P. 283)
The Christmas bonus at Gourmet Foods (Case study 4) for many years that Gourmet Foods never have Christmas bonus when Andrew Straw appointed as a managing director, he decided to give £70 extra for Christmas bonus to all 120 staffs. When they heard the news everyone is very excited and looking forward to it without knowing of the amount of the bonus. After they got the pay slips they very disappointed because they feel it is too small. When their managing director found out about this he wish he did not give it to them and turn it into new packaging equipment instead. . (Leopold, Harris and Watson, 2005, Page 218)
Strengthening management control
Entre Computer Services (Case study 5) Entre Computer Services founded by Ed Souders in 1980s. Souders is a former worker of IBM so he adopted many methods from it including appraisal, pay-for-performance, and sales incentives. Unfortunately, in the 1990s, his business was falling down and almost faced bankruptcy. He decided to make some changes. Using the Deming philosophy along with new strategies can improve sale performances and profits. He created trusting and working relationship. Encouraged more teamwork and less self driven so that his workers gain more passion and happiness toward their job. There are 4 main goals of this method:
Ensure maximum productivity of the Support Team.
Ensure the Personal Development of the Support Team.
Ensure that Support Team members understand what their job responsibilities are.
Ensure employees are as happy as they could possibly be while at work.
(Mary Jenkins, 2002, p.176-178)
Identifying developmental objects
Strengthening the individual employment relationship at the expense of collective
Gainsharing at Southern California Edison (SCE) (Case study 6) In 1994, electricity industry was removed from government control. That made the market more competitive. Therefore, SCE needed to change its compensation for competition. The change was the introduction of a Gainsharing arrangement. Employees were invited to sacrifice 5% of their basic salaries in return for up to 10% gainshare if the organization reaches profits targets. 100% of employees agreed to the plan. Most of them tried to create ideas to save money. For instance, employees agreed to wash their own overalls. The outcome was that the scheme generated an estimate $96 million and $40 million was paid out to employees. More important, the scheme played its part in getting employees focused on what was important in working cost-effectively and being involved in designing effective working methods. (Stredwick, 2005 P.355-356)
Rewarding employees without needing to promote them.”
The Jennings Ford Accident Repair Centre (Case study 7) In the early 1890’s Jennings main hobby was repairing and trading bicycles, moving into premises opposite the old Bridge Street showroom for sale of motorcars employing 6 people in 1911. The company, by meeting Ford Motor Company’s exacting standards, was appointed an authorized dealer for Ford Motor Cars in 1917.
The Jennings Ford Accident Repair Centre in Gateshead has received a reward from Ford Motor Company. Continuing to achieve and improve sales within the centre at the Eslington Park dealership has resulted in a reward for Jennings’ loyal and dedicated centre manger. The manager said “They constantly strive to provide the best possible service to their customer and they are always looking at the ways how to future improve internal systems and procedures”. (http://www.jennings-ford.co.uk/ )
Drawbacks of PFP
Most of us are happy to see individuals rewarded for exceptional performance or effort and would like payment decisions to be based on such criteria. The problem arises when attempts are made to put the principles in practice. Wiscombe (2001) says that “a system which is fair and objective in theory can easily fail to achieve when implemented. Arguing that PFP can have a role to play in organizations, but its positive effects are limited. Moreover, while not fundamentally flawed. PFP is difficult to implement effectively in practice. As a result, system fails as often as they succeed. The major reasons of failures are:
Employees concentrate on their salary and bonuses instead of their jobs.
Most of the staff is demotivated when they are told their ratings.
Gallery Furniture Company (Case study 8) Jim Mclngvale, the owner-President of Gallery Furniture Company applied Dr. Deming’s advice to his business. In 1991, he took commissions, bonuses, and incentives of his sale persons but put it in to their salaries instead. These amazingly increase sales, profits and customer satisfactions; however, some sales people left the company because of disappointments but it still benefit the business in the long run. He also took the appraisal system off because he believes that his employees are not students. He treats his workers with respects and they do the same toward him. (Mary Jenkins, 2002, p.170-171)
People focus on their own objectives instead of cooperation with colleagues.
Some managers change ratings for political reasons.
When the results have an impact on pay levels, employees tend to downplay their weakness. As a result development needs are not discussed or addressed.
Managers avoid demotivating their staff. As a result poor performers are reward as well as good performers.
Homeserve Ltd: The new performance bonus (Case study 9) Jean Frear got a new job at Homeserve Ltd as the HR director. She tried to use new bonus payment method which she think it worked very well at her previous job, the Moddens Food. Normally, the engineers work on Mon to Fri and will get better overtime rate if they work on Sat and Sun. To make it more competitive, she cut the premium overtime rates for Sat and Sun also the evening delivery then based on working hours only. After one year of this experiment, she got the result. The number of the calls from customers is increase about missing parts of the hardware. Overall salary bill is higher than ever but the performance is going the opposite way. She found that the engineers tend to work only for their shifts and hardly willing substitute for the others on holidays or sick leave. (Leopold, Harris and Watson, 2005, page 222-223)
PFP systems tend to discourage creative thinking, challenging of established ways of doing things and questioning attitude among employees.
Low income often leads managers to reduce ratings, creating a situation in which perfect employee performance is not rewarded.”
Pay strategy at Eastern Power plc (Case study 10) At Eastern Power plc, they use the Pay for Performance method to calculate employee’s salary. To make it convenient, it will be decided by senior managements. After 2 years, this method has been complained as an unfair system by most of the employees. According to the line managements, they reported that they had no idea how to improve their performance because the method is unclear. (Leopold, Harris and Watson, 2005, Page 215)
A general tendency is the increasing number of organizations where total compensation contains a part depending on performance. According to the consultation firm Hewitt Associates, 50% of the firms used pay-for-performance in 1990, and in 2000 already 80% (Wiscombe 2001). An analogous tendency is also witnessed in Estonia. According to the salary survey conducted by the consultation firm Fontes in 2005, compensation policies of 91% of the firms in the survey include some kind of pay-for-performance.
Opinions about the effectiveness of pay-for-performance are different. The survey conducted by the Hewitt Associates in 2000 suggested that even these enterprises which have used the pay-for-performance system do not completely believe in its effectiveness: 21% of the firms said they do not believe its effect on improving work performance; 57% believed the effect was limited. A study conducted by the same firm in 1995 indicated that the pay-for-performance system had failed in 48% of the organizations (Wiscombe 2001, www.HYPERLINK “http://www.workforce.com/archive/feature/23/06/78/index.php”workHYPERLINK “http://www.workforce.com/archive/feature/23/06/78/index.php”force.com/archive/feature/23/06/78/index.php.)
Results of other surveys confirm the success of using pay-for-performance. An analysis of pay-for-performance programmes conducted in the USA in the second half of 1990s suggests that performance improves in approximately two out of three programs (Heneman, Ledford, and Gresham 2000).
There are various reasons for the contradictory opinions and results. One may be definitely different methods which are used, differences in business sector, lack of clarity of concepts used by researches. On the other hand, it can be assumed that application of pay-for-performance and its results can only be opposing because the creating, implementation of the respective system and assessment of the results must often link conflicting interests of different stakeholders.
Other Case Studies
Tele-working at the Mid Western Bank
For The Mid Western Bank the Individual Performance is believed to be the best way to rate their staffs’ bonus payments. To make sure of this conclusion they set 4 aspects which are correctness, attendance levels, cooperation (which includes teamwork) and communication skills to confirm it. By making everyone concentrate on only their job, for the top performance employee can have 25 percents of their pay. Unfortunately, this result can be applied effectively with call centre staffs a competitive labour market. The other concern is that this method encourage employee to be more selfish and lost interest in helping the others and the absenteeism is also rising even though it will be effect the rating. (Leopold, Harris and Watson, 2005, Page 234)
Nucor Corporation, United States
Nucor Corporation, the largest steel producer in the United States. The secret to success is to give huge bonuses of 100% or even 150% to 160%, thus, every employee can see how the incentive arrangement affects their wages each week.
Even in the down times, the company doesn’t lay people off. Such as, the plant shuts down its production lines for a day or two a week but salaried executives still work. About 80% of Nucor’s employees are on this production-incentive plan. Other employees also have performance-based compensation.
When the whole organization is involved: To make it work, the most important thing is the involvement of the whole company, even if there is only a 1 percent profit, it should be divided among everyone, including the administration. Everyone is part of the team building. For instance, gives non-production employees other awards -from a free dinners for outstanding work to one share of stock for every year of employment.
Health Net of California
Health Net of California announced that was paying $18 million to 70 physician groups statewide in recognition of their efficiency and quality in 2004. Of the total, $5 million was tied for the Pay for Performance program, which rewards physician groups for providing high-quality clinical care and customer service.
In addition, Health Net is working with through the Integrated Healthcare Association to make wider the potential of Pay for Performance quality measures and increase the proportion of compensation for physician groups that present a commitment to quality and efficiency.
PFP bonuses were paid to Health Net’s commercial physician groups. The other quality disbursements, which are paid to commercial and Medicare physician groups, include shared-risk funds, financial investments in technology and a generic drug incentive program. (www.findarticles.com)
Alan Eagle’s role as Assistant Manager of the Abbey National Community Partnership is to identify opportunities for staff who want to volunteer. He run a matched time scheme where staff can claim up to 35 hours of paid work time per year to match their own volunteering time commitment. Why would a banker necessarily want to be a treasurer in their spare time? Employee volunteers are like any other volunteers – they need to feel that their contribution is worth it. To ensure this, organizations need to offer volunteer roles that are properly thought out. They believe that an employee who volunteers can specify personal objectives for community activities, as well as work related goals, in their annual appraisal. If they achieve those goals they are financially rewarded.
The Royal Bank of Scotland
In 1998, the company launched “RBSelect” that is a total reward benefits package giving employees. The package is divided into six groups: private health cover; insurance, including life assurances for spouses and partners; saving such as voluntary contribution to pension schemes; ‘lifestyle features’, which include the manager’s company car, childcare vouchers and retail voucher; basic salary; and holiday. Even the Christmas bonus can be traded in for a different benefit. Employees can change their benefits package once a year. The new total reward system has been positively received and is expected to have a positive impact on recruitment and retention. (Boddy, 1998 P.282-283)
The National Security Personnel System
Nearly all of the employees in the Defense Department’s new personnel system were rewarded for their job performance in their first paychecks in 2009, with the average pay raise and bonus totaling 8.35%.
98% of the more than 170,000 employees rated under the National Security Personnel System received performance-based payout, meaning their supervisors graded their work as a 3 or better out of 5 possible points. The majority of those employees 55.4% earned a rating of 3, defining them as valued performers.
Worker in the Washington area received the highest overall increase of the General Schedule employees, at 4.78%. General Schedule employees have earnings potential beyond their annual raise, while under NSPS, within-grade pay boosts, quality step increase and bonuses are factored into the overall performance-based pay increase. (http://www.govexec.com/dailyfed/0209/021809b1.htm)
STAFF at Lloyds Banking Group is set to get about pounds 80min bonuses – despite amulti-billion pound bailout from the taxpayer. The payments were apparently authorized by the Government as part of the deal for it to take a controlling interest of at least 65% in the firm. The figure is lower than the pounds 120m Lloyds bosses were thought to be seeking, but will still provoke controversy over rewards for failure. Newspaper reports suggested that some 4,000 junior staff will each get about pounds 1,000 this year, making up half the pay-out. Unions have argued that staff from the former Lloyds TSB deserve to receive bonuses, because their side of the business remained in profit – while its merger partner HBOS lost billions of pounds.
A spokesman for Prime Minister Gordon Brown said Lloyds had agreed that there would be no discretionary bonuses paid in 2009 except to the most junior staff, earning an average of pounds 20,000.
General Motors-Powertrain Division
In the mid 1980s, GM’s sale was going down dramatically and looks to be continued for some times. On contrary, new Japanese company was booming. Behind their success GM found that they used Dr. W. Edwards Deming’s rules. After trying this method for one year GM Powertrain’s H.R. staffs agree that appraisal system has some flaws. (Mary Jenkins, 2002, p.148)
Strategic approach to rewarding performance at Unilever
At Unilever, to improve its employees’ performance and cut off unnecessary pay the manager created the model proved to be effective as global called Work Levels. With six levels of qualitatively different work in the company use to encourage people to work as a team instead of oneself. Predictably, many workers complained at the beginning but years after years it became clear that the method benefits both employees and the company. (Duncan Brown, Michael Armstrong, 1999, p.92-95)
The organizations having job evaluation in practice, are determined the causes of pay inequity through the carefully implementation of pay design that is based on base pay structure. A tentative effort to introduce this discrete and coherent function is required to carry out the comprehensive review. There must be a system of inequity recognition through the organization achieves its smart objectives and vital to prioritize the analysis which are very likely to enlighten on any potential inequities. It is a management tool that asserts the jobs of comparable value are treated and paid equally and emphasizes to estimate the size of inequity.
Nevertheless, change in the pay system in any organization can be resistive. It can be suspected among the employee in term of pay changes, apparently. The purpose of pay system design should not be decrease or cut the employees’ pay rather than fixing the inequity within the organization and taking all the relative perspective into account before the implementation of the required method. To make it constructive, expert facilitation of job design team can be useful to ensure that safe and sound primary principles are going to be followed while the organization gets its cherished goals.
In addition, where it eliminates many flaws in term of analysing the jobs’ worth but also effectively productive with the employers’ perspective. This method can be typically undertaken by the employers to prevent them from prejudice or discrimination and to establish a platform where everyone has got equal opportunity to build up their career. No doubt, it enhances and defines an appropriate and decisive track for any organization practicing this feasible method that can be comp
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